A home loan is a big responsibility. Typically for middle income people it eats away most of their monthly salary. While my dad had a home loan, it used to consume major portion of his salary. Imagine earning Rs. 20000 and paying 12000 for home loan. I assume most of us will face a similar situation.
On the other hand , a home loan creates an asset(atleast technically, though it does not give any regular income). The government wants you to invest and provides lot of income tax deduction and exemptions when investing in a home. Let us try to understand the benefits one can enjoy on a home loan from the tax man.
Income tax benefits of a home loan
It is preferable to understand the tax benefits associated with home loan to benefit from it every financial year. Before beginning with the details of the benefits that can be enjoyed by an applicant while taking a home loan, the repayment of home loan falls into two parts/categories:
- Repayment of the principal amount
- Repayment of the interest
As the repayment falls into two different categories, the income tax benefits enjoyed by the applicant on the home loan are divided into various sections of the Income Tax Act. Claiming the tax deduction is possible using different sections while filing for an income tax return.
Also read: Documents to check when buying a home
Section 80C: Tax Benefit on Home Loan against Principal Amount
It is possible to claim a tax benefit on home loan for the principal amount by an individual or HUF under Section 80C of the Indian Income Tax Act. The maximum allowable deduction under this section is Rs 1.5 Lakh.
There has been an increase in the permissible amount from Rs. 1 Lakh to Rs. 1.5 Lakh during the 2014 Financial Budget.
The tax deduction under this section calculates or is inclusive of the total amount invested in PPF account, taxes, saving fixed deposits, equity mutual funds, national savings certificate, senior citizens, and saving schemes.
The reduction under section 80C is further available as payment basis, irrespective of the payment year. Furthermore, the registration fee and stamp duty also falls under tax deduction, even if the applicant has not applied for a home loan.
The important point is that the applicant should remember is that the tax benefit is only applicable on the principal amount of the home loan only after completion of the construction. Therefore, it is important to submit the construction complete certificate to enjoy the tax benefit.
Furthermore, according to this section, the individual will not be eligible for tax deduction for the years during which the construction was in the process.
If an individual or HUF chooses a property that is under construction, because the price is lower than a completed property, one will still have to compensate the service tax levied on the under construction property.
In addition, the Finance Minister changes the rates of the service tax on under-construction properties during the 2013 Budget. Meanwhile, there is no service tax applicable on a completed construction.
However, if the applicant transfers the property for which he or she claims the tax benefit under Section 80C before 5 years from the date of possession of the property, there will be no deduction and tax benefit on the home loan.
The tax deduction claimed on the property for the respective years will become the income of the applicant. The amount from the sale of the property also becomes the income the applicant shall pay the tax on such amount. The tax deduction will depend on the current income tax slab rate as declared by the government.
Must Read: 7 things to do during home loan closure
Service Tax on under construction property
Service tax on an under construction property is the taxable amount collected by builders, real estate developers or any other individual who offers services for selling the unit. However, the payment is due at the time of construction and before the issuance of building complete certificate by the competent authority.
Although many developers and real estate companies have opposed the move, the court ruled the case in the favor of the government. The following is the screenshot of the computational service tax levied by the government on under construction properties:
Section 24: Tax benefit on interest of the home loan
It is the second component of the income tax levied on home loan. It is possible to seek tax benefit on the interest of the home loan under Section 24 and under the newly described Section 80EE (inducted in the year 2013 and applicable from 1st April 2013).
Corresponding to Section 24 of the Income Tax Act, gaining the tax benefit is possible of the interest an applicant pays towards the housing loan. As per the section, the income from the property decreases according to the interest paid by the applicant towards the loan.
The applicant can use the housing loan to buy, construct, repair, reconstruct or renew a property. As per the rule, the allowable tax exemption is of Rs 2 Lakh for a self-occupied property. If the applicant is not self-occupied, the taxpayer can deduct the tax on the overall interest as prescribed in Section 24.
Clause: If the applicant is not residing in his/her property due to the reason of employment in other state, he or she should reside in a place not belonging to him or her. In such instances, the maximum tax exemption allowed is Rs. 2 Lakh.
Another important constituent to remember is that the tax deduction stated by Section 24 of the Income Tax Act is on an accrual basis. Hence, it is crucial for the applicant to claim tax benefit each year even if there is no payment for a particular year.
It is entirely different from Section 80C where the applicant can claim a deduction only after the payment. In addition, the tax benefit reduces to Rs. 30,000 from the stated benefit of Rs. 2 Lakh, if the property construction does not finishes within three years from the date of receiving the housing loan.
The following is the summary of the deduction prescribed by the government under Section 24 of the Income Tax Act:
Tax treatment on pre-construction units
In many cases, applicants pay the full amount of the property even before the construction is complete. A few people purchase residential units under the loan, before the completion of the construction. They even begin to pay the stated EMIs to the respective bank.
In such cases, the Section 24 clearly states that tax deduction is not possible for the interest paid when the construction is complete. However, if the housing loan is for repairing, reconstructing or renewing, there will be no deduction for the interest paid before completion.
If the loan is for constructing a new unit or buying a property, the interest paid until the construction period becomes aggregated amount and the entire amount is eligible for tax deduction in five installments for a period of five years, starting from the financial year of the completion of the construction.
Mr. A purchased a residential property in New Delhi in the year 2009. He opted for a housing loan of Rs. 10 Lakhs with a reputed bank offering it 10% per annum interest. Completion of the construction was in the year 2011.
Now, according to the Section 24 of the Income Tax Act, tax deduction and benefit is only possible on the interest paid from the year 2011 onwards. However, the interest paid by Mr. A before the completion of the construction falls under the tax deduction. He is eligible for Rs. 2 Lakh as deduction and according to the Section 24 it is payable over the next five years at Rs. 40,000 per annum from the 2011-12 financial year.
- The interest paid on any outstanding amount related to the housing loan does not fall under the tax deduction.
- The applicant enjoys the tax benefit only if the construction of the property completes within three years from the booking of the date the housing loan.
- It is not plausible to add the commission paid by the applicant to obtain a loan.
- If the applicant is paying municipal taxes and interest on a home loan, he/she will incur a loss under the head income. The loss incurred is deductible from the total income of the applicant for that particular financial year.
- If the loss from the house property is not set-off against other incomes, then it is possible to carry forward the same to future financial years for a maximum life span of eight years.
- Claim for tax benefit on the interest paid for a house loan is possible for the applicant alone who borrowed the money for purchase or construction of the property. In the case of successor, the tax benefit is not valid.
Comparison between Section 80C and Section 24
Income Tax benefit for first-time buyers
In order to keep the seller and buyer happy, the government included a new section called the Section 80EE. Under it, the applicant, who is the first-time buyer, enjoys the tax benefits on the interest of the housing loan. Although the limit is at Rs. 1 Lakh, it is applicable only if:
- The loan obtained is between 1st April 2013 and 31st March 2014.
- The loan amount does not exceed Rs. 25 Lakhs.
- The value of the property does not exceed Rs. 40 Lakhs.
- The candidate does not have any other property under his or her name at the time of sanction of the loan.
However, the Section 80EE is only applicable for the financial year 2013-2014. Any first-time buyers will benefit from such a policy as they can avail a tax benefit of Rs. 1 Lakh. In addition, if the interest paid for the fiscal year 2013-2014 does not exceed Rs. 1 Lakh, then the remaining amount is deductible in the following financial year, i.e. 2014-2015.
Tax deduction on home loan is possible and permissible up to the stated limit. Applicants, however, have to be careful while claiming the tax benefit. If you individuals purchase a property jointly, then each person can claim the maximum benefit separately.
People who claim HRA allowance under tax deduction are also eligible to claim the stated tax benefit for home loan under Section 80C, Section 24 and Section 80EE. In order to claim the benefits as stated by the Income Tax, it is essential to furnish the details of the statement provided by the lender that includes information on the amount payable, already paid interest and principal amount.
The remaining amount, which falls under the head income of the individual is eligible for tax and follows the Income Tax slab rates. Hope this article was useful. I tried to get information from existing sources on the net, to make it simple for you. Please let us know if did like the article. Share the article to help others know of the income tax benefits of home loan.