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Basics of Home Loan

To own you dream house is one of the major investment and financial decision. In India, banks offers 85%-90% cost of your house as. Following are few basic factors that come into process of taking a home loan:

Source of Income to apply for home loan

Applicant should have demonstrable source of income with no default. Applicant should not be burdened with other high interest debts which results difficult repayments of home loan.

Tax Benefits from home loan

Applicant can avail tax rebates which becomes important parameter to make investment in the property. Applicant can avail rebate up to Rs.1 lac on principal amount on home loan as per section 80C of Income Tax Act. Applicant can also avail tax rebate up to 1.5 lacs on the interest payable on the home loan as per Section 24(b) of Income Tax Act. This rebate is applicable if the property is self occupied.

Choose Lender

Applicant should collect information regarding interest rates, penalties and other charges and fees levied by the various lenders providing home loans. Find out the best deal by performing market analysis as taking a home loan is one of the most critical decisions. Applicant should verify twice before taking decision on home loan as it affect your credit rating.

Funds to borrow

It is advisable to borrow the lowest amount if possible. You should cash your investment and other resources before deciding the funds to borrow.

Home Loan Process

Applicant has to fill up the formal loan application form providing personal, family, residential, employment and earning information with demonstrable proof along with property information for which you are going to take home loan. This information is verified by the bank or financial institution. It also verifies you credit history and repayment capacity of the loan. It evaluates your application after personal interrogation. A offer letter containing the detailed information of the applicant is prepared after completing legal formalities. The documents are signed by both the parties and thereafter actual disbursement takes place once the post dated cheques are submitted to the bank or financial institution.

Documents Required

Applicant has to submit identification proof, address proof, age proof, employment details and proof of income in the form of last three months salary slip, bank statement of last six months along with copy of income tax returns to the bank or financial institution.

Income from Property

There are different types of income you can earn if you are a property owner. Income depends upon the nature and the purpose of holding a property. A Property can be residential of commercial one.

Income from Residential property

If you own a residential property which may be either occupied by you or rented out to someone. Earning rent is one source of income if you have rented you residential property.

Tax under “Income from House Property”

The income earned as rent is taxable in the hands of recipient under the head “Income from House Property”. The tax liability can be calculated according to the provisions of Sections 22 to 27, after allowing for the admissible deductions. No deductions other than those specified under the Income Tax Act are permissible.

What is taxed under head “Income from House property” is the inherent capacity of the property to earn income called the ‘annual value’ of the property which is taxed in the hands of property owner. Gross annual value is the higher of rent received or receivable, and fair market value or municipal valuation. If however, the Rent Control Act is applicable, the gross annual value is the standard rent or rent received, whichever is higher.

In case a let-out property was vacant for a whole year or any part of the previous year, and owning to such vacancy the actual rent received or receivable is less than the sums mentioned, the amount actually received or receivable will be taken into account while computing the gross annual value.

Net annual value is the gross annual value minus the municipal taxes paid by the owner. This is provided the taxes were paid during the year. Annual value is the net annual value minus the deductions available under Section 24. The deductions under Section 24 are as under:

1. 30% of the annual value as computed above.
2. Interest on money borrowed for acquisition, construction, repair and renovation of property on accrual basis. Interest paid during the preconstruction/acquisition period will be allowed in five successive financial years starting with the financial year in which construction/acquisition is completed. This deduction is also available for self-occupied property and can be claimed up to maximum of Rs. 30,000.

The Financial Act 2001 had provided time period for eligibility to get above deductions from the tax. The act had provided the period from the annual year 2002-2003 the amount of deduction available under this clause would be available up to Rs.1.50 lacs in case the property is acquired or constructed with capital borrowed on or after April 1, 1999 and such acquisition or construction is completed before April 1, 2003. The acquisition or construction of the property must be completed within three years from the end of financial year in which the capital was borrowed.

Income as Capital Gains

In addition to regular rental income, you can also earn income as capital appreciation. In the present era of increasing property prices, there is always a possibility of capital appreciation. An owner may transfer off his residential property. In case the price released is greater than the cost of the house, the owner earns a capital gain. It is taxable under the head “Capital gains”. In case the amount realized is reinvested in property or some specified securities, it is not taxable.

Income from Commercial Property

A commercial property may be rented out or given on lease. The owner earns a regular income through lease rent. The income of lease rent is also taxable under the head of “Income from Business and Profession”. The lease rent earned through leasing out commercial property constitutes business income from the owner of the property. As such, it is taxed as business income. Here the usual deductions are available on expenses. The expenses should be related to earning the income from the commercial property.