Buyers Guide

Why take a home loan?
The benefits of taking a home loan:

The income tax authorities look with favour upon those servicing a housing loan from specified financial institutions. And, it is up to you to be wise enough to take advantage of this.

Who can apply for a housing loan?
Let’s start with Section 24 of the Income Tax Act. ICICI bank.

Interest paid on capital borrowed for the acquisition, construction, repair, renewal or reconstruction of property is entitled to a deduction. That means you are allowed to deduct an amount equivalent to the total interest payable on the housing loan from your taxable income within the same financial year. This is now a substantial amount. It started off with the Income Tax Department offering Rs 15,000 as the maximum amount eligible for deduction in the case of self-occupied property. This later got doubled to Rs 30,000. It did not stop there. After getting enhanced to Rs 75,000, it was then taken to a limit of Rs 1 lakh. Presently, the limit stands elevated to Rs 1.5 lakh.

So, should you borrow money to acquire, construct, repair, renew or reconstruct property on or after April 1, 1999 , you get a deduction of up to Rs 1.5 lakh. The criteria being: the property has to be acquired or constructed by March 31, 2003 and be self-occupied.

When put in figures, this is quite an amount. Assume taxable income of Rs 4 lakh, placing the assessee in the highest tax bracket. Assume interest payment during the first financial year is Rs 1.60 lakh Taxable income stands reduced to Rs 2.5 lakh (Rs 4 lakh – Rs 1.5 lakh being the maximum limit) Total tax amounts to Rs 49,980 (tax of Rs 49,000 + surcharge of Rs 980) Tax saved is Rs 45,900 (tax @30% on Rs 1.5 lakh plus 2% surcharge as the investor is in the highest tax bracket)

That brings us to Section 88 of the Income Tax Act.

You get a 20% rebate on repayment of principal during a financial year. Once again, over the years, the principal repayment eligible for rebate has been enhanced from Rs 10,000 to the current limit of Rs 20,000. Stamp duty, registration fee or other such expenses paid for the purpose of transfer of such house property to the assessee is also considered under this amount. Going back to our earlier example: Taxable income of Rs 4 lakh Taxable income stands reduced to Rs 2.5 lakh Tax before rebate and surcharge: Rs 49,000 (no surcharge is computed as surcharge is applicable on tax payable after allowing for rebate under Section 88) Rebate of Rs 4,000 (20% of Rs 20,000 being principal repayment) Tax less rebate of Rs 4,000 + surcharge @ 2%= Rs 45,900 Tax saved = Rs 49,900 (Rs 45,900 as shown above plus rebate of Rs 4,000)

Who can apply for a housing loan?

Any person, including Non Resident Indians, with a steady source of income can borrow funds for financing the cost of a flat from housing finance companies and banks

Can a Non Resident Indian avail of housing loans?

Yes. Repayment of loan should be made within a period not exceeding 20 years out of inward remittances or out of funds held in the borrower’s NRE/FCNR/NRO accounts.

How much can a person borrow?

Loans are generally disbursed upto a maximum of 85% of the cost of the flat. The balance 15% cost of the flat is to be funded by the flat purchaser from his own contribution.

What is an EMI?

Equated Monthly Installment (“EMI”) is the amount comprising a portion of the interest and the principal loan amount which is payable by a borrower to the lender every month.

How is the rate of interest calculated in India ?

Interest rates vary from time to time and from institution to institution. The current trend ranges from about 9% to 11% pa. The interest calculated either on a daily or monthly reducing or yearly reducing balance.

What is a fixed-rate housing loan?

A fixed-rate housing loan is a loan where the rate of interest is constant through the entire term of the loan period.

What is a floating interest rate housing loan?

A floating interest rate loan is a loan where the interest rate payable is linked to the market conditions such as the bank retail prime lending rate and rises and falls with the bank rate varies. Hence a borrower bears the risk of interest rate fluctuations. Floating interest rates offered are usually lower than the fixed interest rates.

What is the time required for approval of a loan application?

About 5-7 days.

Do institutions accept joint loan applications ?

Yes.

What are the documents required at the time of making an application for a housing loan ?

  • Photographs
  • Proof of age (Passport / License / Voters ID. )
  • Proof of residence ( Ration card / Tel / Electricity bill. )
  • Latest salary slip (proof of income for salaried individuals ).
  • Form 16
  • Bank statements for the previous six months.
  • For self employed, certified copies of balance sheet, profit and loss statement and tax challans / tax returns for the previous 3years for partnership/private limited companies,the articles of association, partnership deed and details about the firm.
  • For NRIs latest salary certificate specifying, name (as it appears in the passport). Date of joining, passport number,designation,perquisites and salary, photocopy of labour card/ identity card, photocopy of valid resident visa stamped on the passport, photocopy of monthly statement of local bank account, property related documents.