Buying a home is a huge step! One big question you might have is whether to get a home loan (a mortgage) or pay for the house all at once with your own money. Let’s break down both options in simple terms to help you decide what’s best for you.
Paying for the House Upfront
Imagine you have enough money saved to buy a house without needing a loan. Here are some reasons why this might be a good idea:
1. No Monthly Payments: Once you pay for the house, it’s yours. You don’t have to worry about sending money to the bank every month. This can make life less stressful.
2. Saving on Interest: When you get a loan, you pay extra money called interest. By paying upfront, you avoid paying thousands of dollars in interest over many years.
3. Easier Buying Process: Without a loan, buying a house can be faster and simpler. You don’t have to wait for loan approvals or deal with bank paperwork.
4. Bargaining Power: Sellers often like cash buyers because the deal can close quickly. This might help you negotiate a better price on the house.
But, There Are a Few Considerations
1. Less Money Available for Other Things: Spending a lot of money on a house means you have less cash for emergencies, vacations, or other investments.
2. Missing Out on Other Investments: If you use all your money on the house, you can’t invest it elsewhere. Sometimes, investing your money can earn you more than you’d save by not paying loan interest.
Taking a Home Loan
To comprehensively understand the tangible advantages of leveraging tax benefits on home loans, let’s explore a practical scenario:
For instance, consider a home loan of ₹70,00,000 at an interest rate of 8.5% per annum with a tenure of 20 years.
| Loan Amount | Rs. 70,00,000 |
| Interest Rate | 8.50% p.a. |
| Tenure | 20 years |
| EMI | Rs. 65,000 |
| Total Interest Paid | Rs. 75,00,000 |
1. Section 24B – Deduction on Home Loan Interest
What It Is:
- Allows you to claim a deduction on the interest paid on your home loan.
Benefits:
- Self-Occupied Property: Deduct up to ₹2 lakh per year on interest payments.
- Rented Property: No upper limit on the interest amount you can claim.
Example:
| Loan Amount | Rs. 70,00,000 |
| Interest Payable Per Year | Rs. 4 Lakhs |
| Tax Deduction | Rs. 2 Lakhs/ Year |
| Tax Bracket | 30% |
| Tax Benefits per Year | Rs. 66,000 |
2. Section 80C – Deduction on Principal Repayment
What It Is:
- Allows deduction on the principal portion of your home loan repayments, up to ₹1.5 lakh per year.
Benefits:
- Reduces your taxable income by the principal amount repaid.
- Also includes stamp duty and registration charges (one-time claim in the year incurred).
| Loan Amount | Rs. 75,00,000 |
| Principal Payable Per Year | Rs. 3.5 Lakhs |
| Tax Deduction | Rs. 1.5 Lakhs per Year |
| Tax Bracket | 30% |
| Tax Benefits per Year | 50,000 |
Total Tax Benefits (Section 24B + Section 80C = Rs. 1.16 Lakhs/ Year
3. Joint Home Loans – Double the Benefits
What It Is:
- When two or more people take a joint home loan and are co-owners of the property.
Benefits:
- Section 24B: Each co-borrower can claim up to ₹2 lakh on interest.
- Section 80C: Each can claim up to ₹1.5 lakh on principal repayment.
- Total Tax Savings: Potentially ₹1.05 lakh per person per year (at 30% tax rate).
Who is Eligible to be a Co-Applicant?
- Father/ Mother
- Unmarried Daughter
- Siblings
- Husband/ Wife
(Minors cannot be considered as co-applicants for a Home Loan)
| Category | Co Applicant 1 | Co Applicant 2 |
| Tax Deduction under 24B | Rs. 2 Lakhs/ Year | Rs. 2 Lakhs/ Year |
| Tax Deduction under 80C | Rs. 1.5 Lakhs/ Year | Rs. 1.5 Lakhs/ Year |
| Tax Deductions/ Year | Rs. 3.5 Lakhs/ Year | Rs. 3.5 Lakhs/ Year |
| Tax Bracket | 30% | 30% |
| Tax Benefits | Rs. 1.16 Lakhs/ Year | Rs. 1.16 Lakhs/ Year |
When you opt for a co-applicant on your home loan, the savings can be substantial due to the ability to claim tax deductions separately. For example, with a co-applicant, the total tax savings can amount to ₹2.32 lakhs annually. Here’s how it works:
- EMI Paid per Year: ₹60,000 x 12 = ₹7,20,000
- Money Saved through Tax Deductions: ₹2,32,000
- Net Money Paid after Deductions: ₹7,20,000 – ₹2,32,000 = ₹4.88 lakhs
By utilising this tax benefit, you effectively lower your financial outflow, paying only ₹4.88 lakhs per year instead of the full ₹7.20 lakhs.
4. Section 54F – Exemption on Capital Gains
What It Is:
- Provides exemption on long-term capital gains from the sale of assets other than residential property if the proceeds are invested in a new residential house.
Benefits:
- Investment Timeline: Purchase a new house one year before or two years after the sale, or construct within three years.
- Exemption Limit: Capped at ₹10 crore effective from April 1, 2024.
Note:
- Useful if you’re selling assets like stocks or mutual funds and investing the gains in a house, reducing capital gains tax.
A Balanced Thumb Rule
For those leaning towards a home loan, the “30-30-30-10 Rule” is a helpful guide:
- 30% for home loan EMIs or rent.
- 30% for necessities and savings.
- 30% for investments.
- 10% for lifestyle and entertainment.
Conclusion
Choosing between a home loan and full upfront payment isn’t a one-size-fits-all decision. It depends on your financial health, future goals, risk appetite, and lifestyle preferences. A home loan offers the advantage of tax savings, financial flexibility, and investment opportunities, while an upfront payment provides peace of mind and complete ownership.
Evaluate your long-term objectives and seek expert advice to align your choice with your financial aspirations. Whether you choose the freedom of a debt-free home or leverage the power of a home loan, the ultimate goal is to make your dream home a reality—on your terms.
