Home loan and tax benefits

There are some tax benefits available on home loans. The tax benefits can be claimed on both the principal and interest components of a home loan as per the Income Tax Act. These deductions are available to assessees who have taken a loan to either buy or build a house, under Section 24(b).

Tax benefits on interest component
If these conditions are met, interest on borrowed capital is deductible up to Rs 1.5 lakhs
Loan is taken on or after April 1, 1999 to buy or build a property. The purchase or construction should be completed within three years from the end of the financial year in which the loan was taken. The bank extending the loan should certify that interest is payable against the loan advanced to buy or construct a house.
If these conditions are not met, the interest on the loan is deductible up to Rs 30,000 only. However, these conditions have to be fulfilled then:
The loan should have been taken before April 1, 1999 to purchase or construct the house. It could have been taken on or after April 1, 1999 if for reconstruction, repairs or renewals of a house. If the loan was taken after April 1, 1999, but the construction is not completed within three years from the end of the year in which capital is borrowed. In addition to these, the principal component of the loan is eligible for a deduction of up to Rs 1 lakh under Section 80C from assessment year 2006-07 .
The maximum deduction permissible in a financial year on the original loan plus on any additional loans taken is Rs 1.5 lakhs. Hence, if your deduction on the existing loan is less than Rs 1.5 lakhs, you can claim further benefits from an additional loan, subject to an upper limit of Rs 1.5 lakhs in a financial year.

It is to be noted that the tax benefits under Section 24 and deductions under Section 80C of the Income Tax Act can be claimed only when the payment is made. If a person fails to make EMI payments, he cannot claim tax benefits on the amount supposed to have been paid. If a person buys a house and sells it within the same year or after three years, and if any profit is made, a capital gains tax liability arises on the profits. For example, if a person purchases a house for Rs 55 lakhs with a loan and sells it in the same year for Rs 75 lakhs, he makes a profit of Rs 20 lakhs.
On this profit, he will be liable to pay short-term capital gains tax since the sale took place in the same year. But, if the sale had taken place after three years, a long-term capital gains tax liability would have arisen. Long-term capital gains are exempt from tax if the profit amount (after factoring in the indexation benefits) is invested in capital gains tax-saving bonds or in a house as specified under Section 54. According to the Income Tax Act, only the person who has taken the loan can claim tax rebates.
Tax deductions can be claimed on home loan interest payments, subject to an upper limit of Rs 1.5 lakhs for a financial year. Interest on a fresh loan can be claimed as a deduction, subject to the upper limit. The interest on a loan, taken for repairs, renewals or reconstruction, also qualifies for the deduction of Rs 1.5 lakhs.
A husband and wife, both of whom are taxpayers with independent income sources, can get tax deduction benefits on the same housing loan. In this case, the tax benefits can be shared to the extent of the amount of loan taken against their names.
If it is proved that a home loan is simply an arrangement between the loan-seeker and the builder or with a third party for the purpose of claiming tax benefits, the tax benefits will not be allowed, and benefits previously claimed will be clubbed to the income and taxed accordingly.

NAB increases home loan interest rates

NATIONAL Australia Bank has become the latest bank to turn the screws on homeowners, hiking its standard variable rate by 15 basis points to 9.61 per cent.

The new rate, which takes effect from tomorrow, will add just over $7 to the weekly repayments on a $300,000 mortgage taken out over 30 years.

NAB is playing catch-up to other major lenders who have already pushed through rate hikes.

On Friday the Commonwealth Bank of Australia lifted its rates by 14 basis points, pushing up its standard variable rate home loan to 9.58 per cent per annum and its basic variable rate to 9.07 per cent.

ANZ also pushed through a sneaky 15 basis point rate rise late on Friday afternoon, after the share market closed. ANZ’s new standard variable rate of 9.62 per cent came into effect today.

St George was the first major lender to move in this latest bout of rate hikes, raising its standard variable rate by 20 basis point to 9.67 per cent on July 4.

Meanwhile, AMP Bank also said it would increase its standard variable home loan interest rate for existing customers by 0.20 per cent, to 9.67 per cent. The standard variable rate for new customers will increase by 0.11 per cent to 9.67 per cent per annum. The changes take effect this week.

The banks have once again moved independently of the Reserve Bank of Australia, which opted to keep official rates steady at a 12-year high of 7.25 per cent when it met on July 2.

The banks have all cited higher borrowing costs as the main reason for raising rates. Banks are finding it more expensive to source money for borrowers.The sub-prime crisis - which was sparked when US lenders lost billions of dollars on bad loans - means banks have pay more for the money they borrow to lend to consumers.

Durbin seeks cap on loan interest

U.S. Sen. Dick Durbin (D-Ill.) has taken aim at the high-interest-loan industry, introducing a bill proposing to cap rates charged for payday loans, car title loans and other forms of consumer credit at 36 percent annual interest.

Payday lenders typically charge anywhere from 200 percent annually to five times that figure depending on laws in states in which loans are obtained.

In effect, the bill would sweep aside rates higher than 36 percent annually in states where higher percentages now apply, but would not affect those with lower rates.

Under a 2005 Illinois law payday loans are capped at about 400 percent annual interest, but the law applies only to loans spanning 120 days. Payday loan firms get around the cap by offering loans of 121 days or longer, which allows them to charge whatever they want, in some cases as high as 1,000 percent.
An effort to close the gap in the 2005 law recently bogged down in the state legislature as payday loan firms and other lenders rallied to preserve interest rates that do not exist in a number of other states.

"It won't help consumers or the payday loan industry," said Steve Brubaker, a lobbyist for payday loan firms in Illinois, referring to Durbin's proposal.

If loans are capped at 36 percent annual interest, Brubaker said, many firms will "have to close the lights and go out of business."

The payday loan industry has swelled to over 25,000 stores across the U.S. in the past decade, and it has also branched onto the Internet, including operating Web sites outside the U.S.

In describing problems faced by consumers, Durbin pointed to a Tribune story about a 66-year-old retiree whose $1,000 car title loan ballooned to $4,000 over time. Her loan was at 300 percent.

"These excessive rates are often hidden and can have crippling effects on those individuals who can least afford it," Durbin said in a statement. "Congress must enact protections against predatory lending."

The Tribune series noted that as payday lenders have shifted to longer-term loans, Illinois officials have no idea what the lenders are charging, leaving the industry virtually unregulated.

Illinois is one of a few states that allow auto title loans and, according to consumer advocates, is the only state with no basic protections for people who put their cars up as collateral.

The Tribune's series detailed a major increase in consumers' complaints about debt collectors who purchase old debts, mostly from credit card companies, and file lawsuits against consumers to garnish their wages with the goal of collecting on the debt. The story showed that in some cases people were sued even though their debt had long been paid off.

Durbin pointed out that Congress several years ago imposed a 36 percent annual interest cap on most loans for military personnel and their families.

Lawmakers acted amid complaints that lenders were targeting members of the military services and their families who were struggling under high interest loans.

His effort is likely to encounter fierce opposition from lenders who have faced increased efforts by states to lower payday loan rates. After Oregon's lawmakers lowered the rate there several years ago, most payday loan companies have closed their business in the state.

Consumer advocates praised Durbin's move. "It sets the bar," said Lynda De Laforgue, co-director of Citizen Action/Illinois. "It is really important because it says that this is the direction we are headed."

Durbin's effort coincides with a drive in Congress and from federal regulators to impose new rules over credit cards used by millions of Americans.

The credit card industry has indicated that it intends to fight changes that it says could slash its revenues.

Senators Push for Low-Interest Loans

Sept 23, 2008 /PRNewswire-USNewswire via COMTEX/ -- - Sens. John Kerry, Chairman of the Senate Committee on Small Business and Entrepreneurship, Olympia Snowe (R-Maine), Ranking Member, Tom Harkin (D-Iowa), Committee member, and Chuck Grassley (R-Iowa) sent a letter to the Small Business Administration (SBA) today urging the Administration to review its new standards for credit elsewhere and ensure that the requirements enable current and future disaster victims to obtain assistance. This call comes after the SBA altered its standards to determine which victims would be eligible for low-interest loans, which significantly raised the number of applicants offered loans at a higher rate.

After Katrina, all but 2 percent of applicants received low-interest loans capped at 4 percent to help them rebuild their homes and businesses. But reports from the Midwest floods show that the SBA is determining that a higher percentage of disaster victims are being offered loans at the higher rate. The victims in the Midwest are being offered more expensive loans -- with rates capped at 8 percent and shorter repayment periods -- at a rate fifteen times as great as after Katrina. This is due to changes made by the SBA to the standards for determining if victims are able to receive credit elsewhere. Victims who can receive credit elsewhere are given loans with the higher rates. The SBA must review these standards and ensure that they are not unnecessarily hurting disaster victims and slowing recovery efforts.

"The goal of the SBA in times of disaster should be to facilitate a quick economic recovery," Kerry said. "But with this change, many of the small businesses vital to our economy could close at a time when their continued prosperity is more essential than ever. This standard must be reconsidered so victims will have the resources they need to rebuild their businesses and their lives."

"With small businesses and homeowners struggling to recover from disasters in the Midwest and Gulf Coast, it is imperative that SBA offer loans at reasonable interest rates to those seeking to rebuild," said Senator Snowe. "Entrepreneurs working to restart operations and create jobs, as well as families trying to restore their homes, should be subject to a fair credit elsewhere test that truly determines whether they can access affordable credit in the private market. The SBA must stand ready to quickly provide low-cost credit under the widest possible set of transparent standards when private lenders are unwilling to do so at competitive rates. I urge the SBA to review its current rules and ensure that they do exactly that."

"Across Iowa, businesses and individuals are still reeling from the devastating floods and they need access to these loans to facilitate their recovery," said Harkin. "The mission of the SBA is to assist with economic recovery after a disaster occurs, and the change they made in their lending criteria is counterintuitive to that."

"Iowans are doing all they can to rebuild their lives, homes and businesses. Iowans are hurting and the Small Business Administration's high loan rates are like kicking somebody when their down. People expect help from their government in times of need. Iowans aren't asking for a free ride, just the same treatment and low rates as those given to victims of Hurricane Katrina," Grassley said.

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