What are the Tax Benefits on Home Loans?
Mahadev Desai is the Founder and CEO of gharpedia.com and SDCPL a leading design consultancy firm having strong national presence. He has a degree in Civil Engineering (BE) and Law (LLB) and has rich experience of 45 years. Besides being the Editor in Chief, he also mentors team at GharPedia. He is associated with many professional bodies. He is also co-founder of 1mnt.in the first in Industry software for contractors’ billing. He is a voracious reader, edited 4 books, and pioneer of book reading movement in Gujarat, India.
We avail home loan for long term, which is a recurring responsibility. But what makes this financial obligation a profitable one, is the tax benefit related to Home Loan. When you are availing home loan, you can increase your asset, and at the same you can enjoy tax benefit. It’s surely sounding intriguing! Let’s close view the topic.
Housing is our basic need. A common individual may end up investing 10 to 20 years of his/her income just to buy the home he/she has always longed for. When a common man decides to own a house, a housing loan is the best feasible option they can have! The tax benefit makes this loan more affordable and many times profitable. Thus, the need for housing gets fulfilled, and at the same time, it helps real estate business offering the scope of employment. Thus, offering tax incentives for housing loan serves multiple objectives, major being “Boon to Economy”.
The tax benefit is an allowable deduction or credit on a tax return intended to reduce a taxpayer’s burden while typically supporting commercial activity as discussed above. The government supports the investment in real estate by allowing tax deductions on housing loans. This makes buying a house lucrative and also supports investment ROI in this sector. Many tax benefits are available, which may vary according to the property type, nature of construction, and home loan amount. For instance, a first-time homebuyer can claim more tax deduction when buying an under-construction property rather than a ready property.
Under the Income Tax Act of 1961, Govt. of India specifically provided provision for various tax benefits, under sections 80C, 24 and 80EE. These are discussed in detail in this article.
Home loan repayment i.e. your EMI consists of two parts, the principal amount and the interest amount. The tax benefit is separate on these two parts and different sections of the Act deals with these parts. Such as section 80C deals with the repayment of the Principal Amount, while Section 24 deals with the interest part.
Let’s understand the tax benefits on home loan in more detail.
Home Loan Tax Benefit on the Principal Amount
Section 80C of the Income Tax Act covers the repayment of the principal amount of the home loan. Under section 80C of the Income Tax Act, you can reduce your taxable income up to Rs 1.5 lacs. Under the Section, Rs. 1.5 lacs is the highest limit to claim deductions. According to the Section, the repayment of home loan principal as well as the expenses incurred on Registration and Stamp duty Act, etc. qualify for the deduction from a taxable income.
You may claim for deductions under this Section on investments in the schemes like the Senior Citizens Saving Scheme, the Equity-Oriented Mutual Funds, the Public Provident Fund (PPF) Account, the National Savings Certificate, and the Tax Saving Fixed Deposits, etc. The limit of Rs.1.5 lacs is the maximum considering all the above taken together. For example, if you invest Rs. 1.5 lacs in PPF alone, you may not get the benefit of repayment of home loan. So you should act cautiously while making your investments and consult your CA/Lawyer before making the investments.
Further, the condition under this section is that if the property is sold before a 5-year period of the purchase, then the tax benefit will get cancelled, and it will be added back to the income. As you will gain profit from the sale of Property. Hence the income tax will include the deductions you had claimed. Also, if the property is an under-construction one, you cannot claim the benefit. Claiming is only possible after completing the construction and after gaining the completion certificate of the said property.
If there are two people who have taken the home loan jointly, such as husband and wife, then a different rule applies. Both the spouses can claim separate deductions in their income tax returns. However, the repayment of the principal amount of the loan can be claimed as a deduction under section 80C, up to a maximum of Rs 1.5 lacs individually by each co-owner.
Benefit on the Interest on Housing Loan
Under Section 24 of the Act, tax benefit on the payment of interest on a home loan is possible as a deduction. According to the Section, interest paid on the home loan is deducted from the house property income where the loan is taken for reconstruction, repair, purchase, or construction of a residential property.
The limit for claiming the tax benefit on the payment of interest is set up to 2 lacs. This was increased in the Budget 2014-15 from Rs 1.5 lacs earlier.
For rented property, there is no upper limit for claiming interest. For the purpose of Income Tax, if more than one self-occupied properties are owned by a person, than only one of them will be considered as Self Occupied. The other House Property will be considered as “Deemed to be Let Out”. So, the property will be taken as a rented property even if it is not given on rent. In this case, the tax deduction of the whole interest amount can be availed of under the Section.
However, if the construction of the house under concern is not completed within the period of five years from the end of the year in which the loan was taken, there will be a reduction in the limit. The interest benefit will be reduced to Rs 30,000 from Rs 2 lacs.
Benefit on the Pre-Construction Interest Amount
Section 24 further states that the tax deduction for payment of interest shall not be allowed for a house under construction, i.e. the house construction must have been completed.
But there is another rule for the loan taken for purchase or construction of a property. The interest paid during the construction of a house can be claimed in five equal installments for five successive financial years, starting from the first year of the construction till the time when the home buyer gets the complete possession of the house, and you can claim the benefit yearly.
Tax Benefit Under Section 80EE
For first time buyers of the home who had taken a home loan during the period of 1st April 2016 to 31st March 2017, the tax deduction limit was increased. This was done by government to increase the amount of investment in this sector. This section states that a first time buyer can claim an additional deduction of Rs. 50,000.
The deduction was allowed only if the value of the purchased property was less than Rs. 50 lacs and the value of the loan sought was less than Rs. 35 lacs.
Additional Information on Tax Benefit on Home Loan
There are a few more points which you should consider about this tax matter. If you have taken a home loan from a friend or a relative, and you are paying the regular installments consistently, then only the interest amount of the home loan payment will be allowed for deduction. For claiming the deduction, you should produce the documents provided by the lender clearly indicating the amount is regularly paid toward the interest and the principal.
You can claim the tax benefit on the interest component of the housing loan even if you have missed one installment payment. The payee should have the copy of interest certificate issued by the lender that specifies the loan amount and the total interest payable in the financial year. However, the tax deduction on principal component won’t be considered in this case by the tax authority.
Thus, it is a potential opportunity to cut down your costs on the home loan and enjoy both short term and long term benefits.
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Co-Author: Het Desai