Mortgage loans are a great help when faced with a financial crisis or shortage of funds. They are a popular choice among borrowers since the rate of interest is lower than other kinds of loans, for example, personal or business loans. A mortgage loan is also considered a relatively safer option because the lender sees it as a secured investment, and thus, offers the best interest rates with the help of a mortgage calculator. But all these reasons aside, not many people are aware that a mortgage loan also is a great way to enjoy some tax benefits. Look at the various types of mortgages and the tax benefits one could earn on a loan against property here in this article.
Types of Mortgage
There are six types of mortgages available in India. These are listed as follows:
- Usufructuary Mortgage – In this case, the property rights are transferred to the lender from the borrower till the amount is repaid.
- English Mortgage – Here, the borrower agrees to transfer the property to the lender in the event of default but once the dues are paid, the property rights are shifted back to the borrower.
- Sub Mortgage – This type of mortgage is customized for borrowers with a low credit score. The interest rates on a sub-mortgage loan are typically higher.
- Simple Mortgage – This refers to when the borrower mortgages the immovable property personally to avail of a loan.
- Fixed Rate Mortgage – This refers to the loan that comes with a fixed rate of interest for the entire tenor.
- Adjustable Rate Mortgage – Here, the interest rates tend to fluctuate as per the varying market trends throughout the loan tenure.
Mortgage Loan Tax Deductions
The interest paid on mortgage loans is tax deductible. Here are a few ways that one can save on tax payments with a property loan:
- The borrower is eligible to claim tax exemptions if the loan amount is used for business purposes. In such an event, he/she can claim benefits against the interest of mortgage loan and additional charges and fees involved. As per Section 37(1) of the Income Tax Act, all these payables can be claimed as business expenditures.
- Under Section 24(B) of the Income Tax Act, salaried individuals are also eligible to claim tax benefits provided the borrowed amount is used for purchasing another property. However, this only applies to residential properties and not commercial properties. One can claim a maximum amount of up to INR 2 lakhs. But one must keep in mind that these benefits will only be allowed if the borrower is able to establish a link between the funds borrowed and the end-use conforming to the ITA Section 24(B).
- Tax benefits cannot be claimed if the amount is being used to revamp or renovate the property kept as a mortgage.
- Talking about tax deductions, one must note that under both Section 24(B) and Section 37(1) of the Income Tax Act, tax deductions can only be claimed on the interest of a mortgage loan, and not on the principal repaid.
- Although a mortgage loan comes with no-use restrictions, it does limit tax deduction claims in certain cases. For example, if the borrowed amount is being used to fund personal expenses, like vacation, marriage, education, etc., then the borrower is not permitted to claim tax exemptions.
- Under Section 80C of the Income Tax Act, the borrower cannot avail of tax exemptions on mortgage loans because the ITA Section only allows tax deductions on fully constructed residential properties.
4 Steps to Claim Tax Deductions on Mortgage Loans
Filing for tax deductions on the interest of a mortgage loan is quite simple. The whole process can be done online. All one must do is follow these steps:
Step 1 – Ownership
It goes without saying that to claim tax exemptions, the individual must have ownership of the concerned property. Therefore, before filing a claim, the borrower must ensure that the residential property is in his/her name.
Step 2 – Documents Required
The borrower will need to submit all relevant documents along with the Income Tax Returns to get the TSD adjusted and claim benefits on the interest of the mortgage loan.
Step 3 – Calculate Interest Payable
Get an estimate of the payable interest using a mortgage calculator. Such a tool also gives the borrower a detailed look at the monthly EMIs, the principal and interest component of every EMI, and the remaining balance after the payment of each EMI.
Step 4 – File a Claim
Get in touch with the lender, fill out the online claim form and furnish the documents required – ITR, ID proof, income proof, property papers, and so on, to file a claim for exemptions on the interest of a mortgage loan.
A Mortgage loan is a kind of credit used to buy or keep a home, land, or different sorts of land. The borrower consents to pay the bank after some time, ordinarily in a progression of customary installments that are isolated into head and premium. The property then, at that point, fills in as a guarantee to get the advance.
People and organizations use home loans to purchase land without following through on the whole buy cost front and center. The borrower reimburses the credit in addition to intrigue over a predetermined number of years until they own the property without a care in the world. Most customary home loans are completely amortizing. This implies that the ordinary installment sum will remain something similar, yet various extents of head versus interest will be paid over the existence of the advance with every installment. Regular home loan terms are for 30 or 15 years.
A borrower should apply for a home loan through their favored moneylender and guarantee that they meet a few prerequisites, including least credit ratings and upfront installments. Contract applications go through a thorough endorsing process before they arrive at the end stage. Contract types shift in light of the necessities of the borrower, for example, customary and fixed-rate credits.
Keeping the several aspects of a mortgage loan and tax benefits in mind, one must discuss all the probabilities, terms, and conditions of the mortgage plan before availing of a loan or claiming tax exemptions as per eligibility.
