28 July 2024
To determine how much income your client should show on their income tax return (ITR) to qualify for a housing loan of ₹7 lakh, and to estimate the related tax liability, several factors come into play. Lenders typically assess a borrower’s eligibility based on income, existing liabilities, and creditworthiness. Here’s a general approach to estimate the income and tax implications:
### **1. Understanding Housing Loan Eligibility**
Banks and financial institutions use various criteria to determine loan eligibility, including:
- **Income Level**: Higher income improves loan eligibility. Typically, lenders look at net income after tax and existing obligations. - **Debt-to-Income Ratio**: Lenders often consider the ratio of monthly debt payments to monthly income. This ratio varies by lender but is commonly around 40-50%. - **Credit Score**: A good credit score improves eligibility and terms.
### **2. Income Required for a ₹7 Lakh Loan**
To estimate the income required for a ₹7 lakh loan, consider the following:
- **Loan Tenure and Interest Rate**: Monthly EMI (Equated Monthly Installment) is determined by the loan amount, tenure, and interest rate. Assuming a 7% annual interest rate for a 5-year term:
- Using an EMI calculator, a ₹7 lakh loan at 7% interest for 5 years results in an EMI of approximately ₹13,200. - For a 10-year tenure, the EMI is around ₹8,500.
- **Income Requirement**: To comfortably handle the EMI, the general rule is that the EMI should not exceed 40-50% of the borrower’s net monthly income. Thus:
- For a 5-year term with an EMI of ₹13,200, a monthly income of around ₹30,000 to ₹33,000 may be required. - For a 10-year term with an EMI of ₹8,500, a monthly income of around ₹20,000 to ₹25,000 may be sufficient.
### **3. Estimating Tax Liability**
Income tax liability depends on the total taxable income and applicable tax slabs. For simplicity, let’s consider a basic calculation:
**For FY 2023-24 (Assessment Year 2024-25)**
- **Tax Slabs for Individuals Below 60 Years** (Old Regime):
- Income up to ₹2.5 lakh: Nil - Income from ₹2.5 lakh to ₹5 lakh: 5% - Income from ₹5 lakh to ₹10 lakh: 10% - Income above ₹10 lakh: 30%
- **Deductions**: - **Section 24(b)**: Deduction on home loan interest (up to ₹2 lakh per year). - **Section 80C**: Deductions for principal repayment, etc. (up to ₹1.5 lakh per year).
**Example Calculation:**
Assume the client has an annual income of ₹4.8 lakh (₹40,000 per month):
1. **Tax Calculation Without Deductions**: - Income up to ₹2.5 lakh: Nil - Income from ₹2.5 lakh to ₹5 lakh: ₹2.5 lakh * 5% = ₹12,500 - Total Tax: ₹12,500
2. **Tax Calculation With Deductions**: - Assuming deductions under Section 80C and Section 24(b) are claimed, the taxable income could be reduced.
### **4. Practical Recommendations**
- **Income Shown**: To comfortably get a loan of ₹7 lakh, the client should ideally show an annual income of at least ₹2.4 to ₹4 lakh, depending on the loan tenure and EMI amount. A higher income improves chances and loan terms. - **Loan Documentation**: Ensure that all income documentation is accurate and reflects the client’s financial status to facilitate loan approval. - **Consult a Financial Advisor**: For a detailed assessment tailored to your client’s specific situation, consulting a financial advisor or loan specialist is advisable.
This approach provides a general guideline, but actual requirements can vary based on the lender's policies and other financial factors.