5 May, 2012, 02.16PM IST,

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Vikas AgarwalVikas Agarwal,TNN

Home loan, an incentive to save on tax while acquiring an asset

Everyone dreams of buying a house. Since an investment in a house is large, it takes a lot of financial planning and discipline from the investor. Funding a property purchase through a home loan is the way to realising the dream. A home loan comes with many incentives and tax advantages.

However, it requires a good amount of analysis to understand the various costs and savings involved with a home loan to get an idea of the total cost of the loan. The total cost of the loan includes not only the interest cost but several other costs.

Arriving at cost of loan:

Processing fee

The processing fee is payable at the time of applying for a loan. It varies from a few thousand rupees to a per centage of the loan amount applied for. This fee is not refundable and is charged to cover the administration costs of scrutinising the loan eligibility of the applicant.

Administration fee

This fee is charged while sanctioning the loan amount. It is charged at the time of the loan disbursement and ranges from 0.25 per cent to one per cent of the total loan amount sanctioned.

Legal cost

Banks go through a legal evaluation of the property during the processing of a home loan application. The costs related to legal expenses are passed on to the borrower as legal costs.

Income tax savings

A home loan attracts a significant amount of saving of income tax. A home loan borrower can claim a deduction of up to Rs 1.5 lakhs from the taxable income against the interest paid on a housing loan.

The repayment of the principal amount on a home loan is eligible for an income tax rebate of up to Rs 1 lakh under Section 80C . Therefore, a home loan is a significant tax incentive for borrowers, especially for those in the highest taxable bracket.

A home loan insurance cover, available through various insurance companies, covers the home loan liability of an individual. These policies cover the home loan if something happens to the borrower.

In these policies, the sum assured is adjusted against the home loan liability with every EMI paid. Home loan insurance comes handy for risk-averse homebuyers and for those who do not have adequate life insurance cover.

Many home loan insurance products provide a cover to pay the EMIs in case the borrower has a long sickness or loss of job phase when he cannot pay the debt. It is important for borrowers to spend some time and figure out the appropriate insurance product that meets their need.

Market favourable

Analysts say the current market conditions are quite favourable for those looking at investing in a property. The home loan interest rates have also dropped slightly due to the monetary policy softening by the Reserve Bank of India (RBI). Therefore , those looking at investing in a property can lock in to a good property and home loan deal.

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