If you own a residential/commercial property that has no debt on it and earns a steady rental income then read ahead.
Current Indian income tax rules promote tax savvy individuals to take on bank loans. However most individuals are in so much hurry to pre-pay their mortgages that they miss out on this opportunity.
Firstly government allows individuals to get tax rebate on 1.5 half lakh rupees of interest expense on home loan. So that is a cool saving of 50,000/- per annum in tax.
Secondly as per the current income tax laws, an individual has to pay income tax on the rental income. 15% of the income can be offset as maintenance. However if one takes a small loan against that property, then its interest expense can be deducted from the rental income and save tax.
One can get home loan for 8.25% p.a. and save tax using the above mentioned procedure, then effective interest rate would be 5.45% p.a. (tax rate of 33%). One can use this loan to clear the higher interest rate debt or reinvesting the money received in tax (and risk) free securities that earn a higher return one can save tax.
E.g.: post office PPF generates 8% per annum tax free returns.
PS: I am not an authorized tax consultant. So please check with your financial/tax planner before taking out such a loan.