Home Loan Tax Benefits

Home Loan helps you to live in your dream house, even at an early age. There are lot of tax benefits available on home loan. For some people, home loan tax benefit is the biggest reason to avail home loan. Lets discuss the benefits.

Home loan EMI is basically divided into 2 parts i.e. Principal Repayment and Interest Payment. Both of them have different tax treatments. At the end of financial year ask your bank (loan issuer) for interest certificate.

This certificate clearly states these two components.

Home Loan Principal Repayment

• Amount paid for principal repayment can be availed for tax benefit under Section 80C of IT act. This component is one of the many components which provide tax benefit under section 80C. Some other components are PPF, EPF, ELSS, Insurance premium, School fee, NSC etc. Contribution from all these components combined together is limited to Rs one lakh fifty thousand per year. Stamp duty and registration charges can also be clubbed for deduction under Section 80C during the year when it is registered.
    
• Benefit is available only on purchase or construction of residential property. It means if you take home loan for renovation or repair of house then tax benefit is not available. If you have taken loan for commercial property then also it is not available.
    
• This deduction is limited to self occupied property and not for vacant or let out property. It means you can not club principal repayment for multiple home loans. Deduction is available only for the property which is self occupied.
    
• Deductions claimed under Section 80C for principal repayment are reversible if property is sold with in 5 years from the financial year in which possession is taken or property is bought. Deductions claimed during these 5 years will be treated as income i.e. taxable for the financial year in which you sold the property.
    
• If you have taken loan on more than one property then only one property can be claimed as self occupied. Other properties can not be treated as self occupied, they are treated as let out or deemed if they are vacant.
    
• Deductions for principal repayment can not be claimed for a under construction. To claim deductions property needs to be completed.
     
• In case of joint property both owners can claim deduction. For example, if principal component is Rs 3 lakh or more then both owners can claim Rs 1.5 lakh under Section 80C. Say, if principal component is Rs 2 lakh then they can divide it as Rs 1.5 lakh & Rs 50,000 or they can divide equally as Rs 1 lakh each or in any other ratio.

Home Loan Interest Payment

• Under Section 24 of IT act, amount paid for interest payment can be claimed for deduction.
    
• This deduction is available for construction , purchase, repair and reconstruction of both residential and commercial property. This is a major difference between home loan principal repayment and interest payment.
    
• Deduction is available for self occupied as well as vacant/let-out property, while principal component is limited to self occupied property.
     
• There is a limit of Rs 2 lakh that can be claimed for deduction. This limit is applicable for both self occupied and let-out property. Before budget 2017, this limit was applicable for only for self occupied property.
     
• For rented/let-out property, borrower can only claim deduction of up to Rs. 2 lakh per year after adjusting for the rental income. And the amount above Rs. 2 lakh can be carried forward for eight assessment years for rented/let-out property. For example, interest outgo on rented property or second property is Rs 4 lakh in a year and the rent earned from this property is Rs 1 lakh annually. Loss from this property is Rs 3 lakh. Such buyers, are allowed to claim only Rs 2 lakh for this year and remaining Rs 1 lakh can be carried forward up to eight financial years and be adjusted later. Till last year buyer could had claimed whole Rs 3 lakh in above case.
     
• For repair or renovation of property, only Rs 30,000 shall be allowed for deduction and not Rs 2 lakh. For construction or purchase of new property only Rs 2 lakh deduction is allowed.
      
• Deduction on home loan interest cannot be claimed when the house is under construction. It can be claimed only after the construction is completed. The period from borrowing money until construction of the house is completed is called pre-construction period. Interest paid during this time can be claimed as tax deduction in five equal installments starting from the year in which the construction of the property is completed.
     
• Processing fee paid at the time of availing loan or any Prepayment fee (penalty) paid for home loan can also be claimed for deduction under section 24. This deduction is available for both self occupied and let-out property.
      
• In case of joint property both owners can claim deduction. For example, if interest outgo is Rs 4 lakh or more then both owners can claim Rs 2 lakh individually. Say, if interest outgo is Rs 2 lakh then they can divide it in any proportion 100% and 0%, 50% - 50%, 25% - 75%, but the total amount claimed cannot be more then interest outgo.
     
• Deduction is available on an accrual basis and not on a payment basis. Hence, deduction under Section 24 can be claimed on yearly basis even if no payment has been made during the year but interest has accrued.
       

First time home buyers

• First time home buyers will get an additional exemption of up to Rs 50,000 on interest paid under Section 80EE for loans up to Rs 35 lakh with cost of home up to Rs 50 lakh.
• This deduction is available over and above Rs 2 lakh limit. This is applicable only for individuals.
     
• To claim deduction loan need to be sanctioned between 01.04.2016 to 31.03.2017 and no other house is owned by you.
     
• To claim deduction this property needs to be self occupied.

Home loan from parents or relatives

You can also take home loan from parents or relatives or friends. Loan from parents is mainly used to save tax as the interest outgo is to parents and not to any bank or govt institution. However, for such loans tax treatment is slightly different.

• Principal component can not be claimed under Section 80C. To claim principal component, home loan should be availed from RBI or NHB regulated loan lenders.
     
• Interest outgo can be claimed under Section 24.

Summary

Tax benefits	Principal Repayment	Interest Payment
First Home – Self Occupied	Actual principal repaid or Rs 1.5 lakh which ever is less can be claimed under Section 80C	Actual home loan interest paid subject to a maximum of Rs. two lakh. Additional exemption of upto Rs. 50,000/- on interest paid for loans upto Rs. 35 lakhs with cost of home upto Rs. 50 lakhs.
First Home – Rented/Vacant	None	Capped at cumulative Rs. two lakh or actual interest paid for all properties owned by a tax payer. Amount above Rs. two lakh can be carried forward for eight assessment years
Second Home or Additional Property	None	Capped at cumulative Rs. Two lakh or actual interest paid for all properties owned by a tax payer. Amount abobe two lakh can be carried forward for eight assessment years
Under Construction	None	None during construction. After completion it can be claimed in five equal installments with in overall limit of Rs. two lakh.

   

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