The Budget 2014 made purchase of homes more attractive, at least for the middle class, by raising deduction against interest payment on home loan from the taxable income to Rs 2,00,000 from Rs 1,50,000. This will enable a home buyer to save an additional amount of Rs 15,450 from his or her tax liability.
It will also, in effect, lower interest rates for home loans. If said that one has taken a loan of Rs 25,00,000 to buy a house at an interest rate of 10% for 20 years, the EMI will be around Rs 24,125, which adds up to Rs 2,89,500 annually. Out of this, Rs 2,50,000 will go towards interest payment and the rest — Rs 39,500 —will be used for principal repayment. The buyer can avail a deduction of Rs 2,00,000 from his or her taxable income as the interest payment will be Rs 2,50,000 in the first year. This will enable the buyer to save Rs 61,800 from tax liability if his or her income is in the highest tax bracket of 30.9%. The net tax outgo after adjusting for the savings in tax will be only Rs 1,88,200. As the loan amount is Rs 25,00,000, the net interest rate will work out to only 7.53%. But if the borrowed amount increases, the net interest rate will increase. So if the loan amount is Rs 1,00,00,000 at 10% rate, the net interest rate will be 9.38%. This is because the tax benefit remains at Rs 61,800 only.