Home Loan Tax Benefit for Balance Transfer - Pre and Post-Budget 2019

Financial products like home loans have become an essential tool to mitigate long-term, high-cost monetary requirements across various income groups in India. High loan amounts, borrower-friendly terms, and additional advantages like home loan tax benefits make them ideal for today’s financially aware India.

Home loans offer tax benefits primarily with Section 80C and Section 24b of the Income Tax Act of India. A borrower can avail up to Rs. 1.5 Lakh on principal repayments and up to Rs. 2 Lakh on interest payments every financial year till the loan is fully repaid. These home loan tax benefits are also available if the individual opts for a balance transfer or a top-up loan.

Tax Benefits on Balance Transfer

Balance transfer of a home loan is a facility via which the borrower can transfer the outstanding loan amount from the existing lender to a new one. Primarily, such processes are done to lower loan interest rates. However, one can also avail home loan balance transfer to avail a top-up loan above of the primary credit.

Tax benefits on a home loan transfer are available under Section 24b of the Income Tax Act although, only if they avail a top-up loan. A borrower can avail a maximum exemption of Rs. 30,000 on the interest paid for the top-up loan per financial year. Note that the funds from the top-up loan should be utilised directly for property acquisition, renovation or repair, etc.

Also, they can claim tax deductions on the interest of the primary loan amount, which makes home loan an ideal investment for all borrowers.

However, in this case, the deduction will be calculated after withholding the home loan exemption limit (Rs. 30,000) from the total (Rs. 2 Lakh). For example, the total tax benefits on the primary home loan will be calculated on Rs. 1.7 Lakh (after deducting Rs. 30,000 from Rs. 2 Lakh) if a borrower opts for a top-up home loan. The total deduction will not exceed Rs. 2 Lakh limit in a financial year.

Pre and Post-Budget 2019

Presently the interest on housing loan can be claimed in 2 different scenarios.

  1. One Self-Occupied and One Let-Out Property –

Tax deductions of up to Rs. 2 Lakh can be claimed only on a self-occupied property. There will be no upper limit applied for the let-out house.

  1. Both Let-Out Property –

The entire interest on housing loan can be claimed for deduction from the taxable income in case both are let-out properties. The Income Tax Act does not impose any limit on the amount that can be claimed for deduction.

The latest interim budget suggested updating the ruling to consider both housing properties as self-occupied. All notional income would not apply for this scenario. The total interest for deduction will be limited to Rs. 2 Lakh.

Applicable Clauses

A borrower has to meet specific clauses to avail tax benefits on home loan interest rates. Let’s take a look –

● The deductible limit is applicable if the mortgaged property is a self-occupied house only.

● An applicant will have to submit all the relevant documents and receipts proving that the top-up loan was used for acquisition, construction, renovation, or repair of a house.

● Borrowers can enjoy tax benefits only for the duration of the loan tenor. The added time required for home loan balance transfer will be calculated under this facility.

● Additional deductions of up to Rs. 50,000 will be applicable for properties bought at less than Rs. 50 Lakh. These deductions will be effective if the loan amount availed is less than Rs. 35 Lakh and only in case of first-time borrowers who will reside in the property.

When to Consider a Balance Transfer?

A borrower should go for a home loan transfer when –

● A lender charges higher interest rates than current market rates.

● A borrower wants to reduce risk by converting floating interest to fixed. In this case, they should use a home loan EMI calculator to check whether the new terms are favourable or not.

● A borrower requires additional funding to tackle unforeseen expenses of constructing a house.

There are various NBFCs in the market which offers different features at attractive terms. NBFCs like Bajaj Finserv even provides offers which are pre-approved on advances like home loans, unsecured credits like personal loans, business loans, and a range of other financial products. Choose your lender wisely and do proper research before opting.