Budget 2016-17: For first-time home buyers, additional deduction of Rs. 50,000 on interest, How helpful is it?

Budget 2016-17: 

Fnance Minister Mr. Arun Jaitley brought cheer to first-time home buyers by offering an additional deduction of Rs. 50,000 on interest repayment under Section 80EE.

Homebuyers already enjoy a deduction of Rs. 2 lakh on interest repayment under Section 24 for a self-occupied property, and a deduction to the extent of Rs. 1.5 lakh on principal repaid under Section 80C.

This new benefit, however, comes with a number of limitations.

Depending on the tax bracket under which you fall, this new deduction will allow you to make tax savings in the range of Rs. 5,150 to Rs. 15,450.

Next, let us examine the case of a person who takes a loan of Rs. 35 lakh at the rate of 9.5% for a tenure of 15 years.

His equated monthly instalment comes to Rs. 36,500

His interest repayment in the first year comes to about Rs. 3.28,000.

The total deduction he can claim on interest repayment is Rs. 2.50,000 (combining sections 24 and 80EE).

Thus, he still can’t claim benefit on the entire interest amount repaid (in this case).

Moreover, he will be able to reap the benefit of Section 80EE only for nine years out of the tenure of 15 years. After nine years his interest repayment will fall below Rs 200,000, so the benefit will become redundant.

One option before this individual is to reduce the amount he borrows to Rs. 27 lakh, in which case his interest repaid from the first year will drop to about Rs. 2.5 lakh

The other option is to take a joint home loan along with his spouse.

Once he/she takes a joint home loan, however, Section 80EE does not come into the picture, according to a note from EY LLP.

The spouse’s Section 24 deduction alone will suffice to account for the entire interest repaid.

The proportion in which a joint home loan is taken is important.

“If the spouse in the higher tax bracket takes a higher proportion of the loan, the tax saving will be higher,” says Alok Agrawal, partner, Deloitte, Haskins and Sells.

Another point to remember about opting for a joint loan is that both partners should have their own incomes to pay the EMI, and both must be first-time buyers.

Section 80EE comes with pre-conditions. The loan must be sanctioned in financial year 2017.

This should be the buyer’s first purchase.

The cost of the property should not exceed Rs. 50 lakh and value of the loan should not exceed Rs 35 lakh.

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