Decider: To loan or not
IF you want to buy a house, you have two options to fund it …
Either use your own funds or take a loan. Most of us obviously would not be
able to afford an outright purchase (without availing of any loan whatsoever).
IF
you want to buy a house, you have two options to fund it ….. Either use your
own funds or take a loan. Most of us obviously would not be able to afford an
outright purchase (without availing of any loan whatsoever). However, even if
you are one of those fortunate few who have the wherewithal to buy a house off
the shelf, you should avail yourself of a loan. The following explanation will
tell you why.
Well, for starters, interest outgo on the loan up to Rs 1,50,000 is tax deductible. Moreover, the capital repayments are eligible for Sec 80C deduction up to Rs 1,00,000. Now, if one were to use one’s own funds, these benefits are forgone. There are absolutely no tax benefits available for someone who wants to buy his property outright without taking a loan! This does seem a bit unfair, but that’s the way the law is.
Now taking a step further. How much loan should you opt for? If you take a loan, you pay a higher rate of interest than what you earn on your own funds. So should you use your funds for buying the house? In that case, you lose the tax advantage.
Therefore, you have to weigh the benefit of the tax advantage of taking a loan against the loss due to higher interest outflow. Obviously, there is a break-even point, which can help you in arriving at the optimal mix. The answer would of course depend upon variable parameters like the interest rate on the loan and what your own funds earn outside.
Well, for starters, interest outgo on the loan up to Rs 1,50,000 is tax deductible. Moreover, the capital repayments are eligible for Sec 80C deduction up to Rs 1,00,000. Now, if one were to use one’s own funds, these benefits are forgone. There are absolutely no tax benefits available for someone who wants to buy his property outright without taking a loan! This does seem a bit unfair, but that’s the way the law is.
Now taking a step further. How much loan should you opt for? If you take a loan, you pay a higher rate of interest than what you earn on your own funds. So should you use your funds for buying the house? In that case, you lose the tax advantage.
Therefore, you have to weigh the benefit of the tax advantage of taking a loan against the loss due to higher interest outflow. Obviously, there is a break-even point, which can help you in arriving at the optimal mix. The answer would of course depend upon variable parameters like the interest rate on the loan and what your own funds earn outside.
The greatest advantage of taking a
loan emanates out of the tax breaks. It is in the interest of the investor to
maximize these tax breaks. Using own funds results in foregoing the tax
advantage.
Also note that the ceiling of Rs 1,50,000 on interest is only in the case of self-occupied property. In the case of let out property, there is no ceiling on the interest deduction i.e. full interest paid is deductible. In this case, obviously, taking a loan would be advantageous. There is no question of using one’s own funds.
Also note that the ceiling of Rs 1,50,000 on interest is only in the case of self-occupied property. In the case of let out property, there is no ceiling on the interest deduction i.e. full interest paid is deductible. In this case, obviously, taking a loan would be advantageous. There is no question of using one’s own funds.
Happy Investing
Source:Moneycontrol.com
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