Home loan purely from an income tax benefit point of view

POSTED BY sunil ON May 19, 2011 3:21 pm COMMENTS (2)

I keep listening from people that “I am buying home with home loan to save tax”. While I agree that it is a good idea to buy home as an asset building agenda, I have a question from the income tax point of view. Let us say, I have one own home (no rent) and no plans to build asset (for the sake of argument), does it still make sense to take home loan for the sake of income tax benefit. My thinking is as follows…

If I am getting 10L anually, and assume I pay 30% tax on whole amount, I end up paying 3L as income tax and left with 10-3=7L in my pocket at the end of the year. If I take a home loan and pay 1.5 interest which is tax free, I have to pay 30% interest on 8.5L which will be ~2.5L. Though I am paying 0.5L less income tax, I have only 10 – (2.5+1.5) = 6L at the end of the year. Also let us assume that for 80C section, I invest other money in place of principle repayment benefit. My basic point is that the interest is going to bank’s pocket and not mine.

Is my understanding correct ?

2 replies on this article “Home loan purely from an income tax benefit point of view”

  1. Sunil

    But if you take the home on loan , then you are also saving the whole amount which you might have paid .

    If you dont take loan , then you pay 30 lacs for home and you have 7 lac at the end of the year in your hand

    If you take loan , then you have those 30 lacs in your hand , and your in hand money is 6 lacs , not if you put this 30 lacs in something which earns you some income , you can have more money at the end of the month , correct ?

    1. sunil says:

      In this hypothetical situation, the primary motive is not to buy home. The primary motive is to have maximum money in my pocket at the end of the year. From the money I collected at the end of the year, I may do some other investement like buying a land etc.

      So, let us not assume that I am going to pay 30L in cash for home instead of home loan.

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