You can use the money saved by the lower income tax rate to prepay a part of your home loan. A part prepayment helps in reducing the tenure as well as the overall interest cost In a welcome decision, the finance minister reduced the income tax rate from 10% to five per cent for the slab of Rs 2.50 lakh to Rs 5 lakh. This will result in tax savings for many professionals. Further, in case you use the tax saving avenues provided under Section 80C entirely, you can reduce your tax liability to zero, thereby generating additional disposable income.The existing provisions of Section 87A provide for a rebate of up to Rs 5,000 from the income tax payable by an individual if the total income does not exceed Rs 5 lakh per annum. In view of the proposed rationalization of the tax rate for individuals in the income slab of Rs 2.50 lakh to Rs 5 lakh, it is proposed to amend this so as to reduce the maximum amount of rebate available under this section from the existing Rs 5,000 to Rs 2,500. Further, this rebate will be available only to individ uals whose total income does not exceed Rs 3.50 lakh per annum.
The combined effect of both these measures will mean there will be no tax liability for people with income of up to Rs 3 lakh per annum and the tax liability will only be Rs 2,500 for those with an income of Rs 3-3.50 lakh per annum. If the exemption limit of Rs 1.50 lakh under Section 80C is used fully, the tax liability will be zero for those with an income of Rs 4.50 lakh per annum.
While the tax liability of those with an income of up to Rs 5 lakh per annum will be reduced to half, all the other categories of taxpayers in the subsequent slabs will also get a uniform benefit of Rs 12,500 per annum.
Now, this saving can be gainfully used meeting your expenditures, investments, etc–to pay your EMIs or prepay a part of your home loan and thereby reduce the interest burden.Using the saving to pay back a portion of the principal amount of a home loan will reduce the EMIs as well as the overall interest cost.