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Tax Benefits on Home Loan

One of the upsides of taking a home loan is the tax benefits available. Tax rebate on home loan reduces the burden of individual tax outgo, which eases the pressure on the taxpayer who has taken the loan.

Everybody dreams of owning a home at some or the other point in their life. The government of India has always encouraged the citizens - through various progressive schemes - to invest in a house. One such measure is allowing tax benefits on home loan under Section 80C of the Income Tax Act, 1961. The tax benefits help a person to save money on the tax outgo. Schemes like Pradhan Mantri Awas Yojana are striving to solve the housing problem by making homes affordable and accessible to all. Read on to know more about tax benefits on a home loan.

Deduction for Interest Paid on Housing Loan

Home loan is given strictly for the purpose of purchasing or constructing a house. The construction of the house needs to be completed within 5 years from the date the home loan was issued. The home loan has two components – interest and the principal amount. The annual interest paid for the home loan can be claimed as a deduction up to the amount of INR 2 lakhs under section 24 of the Income Tax Act, 1961.

The maximum interest paid on self-occupied house property for the assessment year 2018-2019 is INR 2 lakhs. There is no upper limit set for let out property. The overall loss that one can claim under the house property head is limited to INR 2 lakh only. This deduction can be claimed from the year when the house construction is completed.

There is a concept of Preconstruction interest in the law. Under this, any interest incurred and paid for under construction of house property shall be allowed as deduction. The following are the steps and details required for calculation of the same:

  1. Date of start of the home loan
  2. Date of possession of the property
  3. The last date of the financial Year immediately following the date of Acquisition or Completion
  4. Calculate Pre-construction Period that is Period from Step 1 to Step 3
  5. Calculate Pre-construction Interest i.e., the total interest paid during the prior period.
  6. Calculate Allowable prior period interest (APPI). APPI = Prior period interest as per Step 5 divided by 5; as the same shall be eligible on a deferred basis.
  7. Claim 1/5 of total Period Interest while filing ITR along with current year interest.

What are the Tax Rules for Home Loan Tax Exemption?

Based on the current rules, house property is classified into two types: Let out property and Self-occupied property. Let-out property is the one which is given on lease or rent. Self-occupied is as the name goes, occupied by own self.

Tax Rules for Let-Out Property:

Tax Rules for Self-Occupied Property:

For self-occupied property acquired in the course of acquisition or construction, interest on loan or INR 2,00,000/- whichever is lower is allowed as deduction. It is pertinent to note that such construction should be completed within five years from the end of the financial year in which capital is borrowed.

Where a loan is borrowed for repairs or renovation of the self-occupied property, interest up to INR 30,000 is allowed as deduction. No flat 30% deduction is available under section 24(a) of the Act for self-occupied property.

Tax Benefits on Home Loan

Under the Income Tax Act, home loans provide the taxpayer with benefits such as reduction in tax liability. A home loan can be divided into two parts: Interest and Principal.

In order to claim benefits, one must be the owner or co-owner of the property.

Home loan tax deduction benefits
DeductionSectionMaximum Deduction that can be claimedConditions to claim these deductions
Principal80CINR 1.5 lakhs Property should be held by the tax payer for a minimum of 5 years.
Interest24(b)INR 2 lakhs Property must be acquired through purchase or construction and construction should be completed within 5 years.
Interest80EINR 50,000 Maximum loan be INR 35 lakhs and the property value should not be greater than INR 50 lakhs.
Stamp duty80CINR 1.5 lakhs It is a payment-based deduction, which means it can be claimed in the year in which such expenses are actually paid.

Deduction for Buyers who have Purchased House for the First Time

Under Section 80EE of the Income Tax Act, first-time buyers can avail a maximum deduction of INR 50,000/-. For claiming this deduction, the following four conditions should be satisfied:

What are the Tax Benefits on Second Housing Loan?

Under Section 24(b) of Income Tax Act, the taxpayer can claim a deduction of an amount not exceeding Rs. 2 lakhs paid as interest on housing loan. Stamp Duty charges paid can also be claimed under Section 80C up to INR 1,50,000/-.

What are the home loan tax benefits on Let-Out property?

Following are the tax benefits on home loan availed for a let-out property:

  • Deductions of interest paid on housing loan can be claimed. Here, deduction of housing loan can be claimed without any limit.
  • Municipal taxes paid can be claimed as a deduction in the year in which it is paid.
  • Under section 24(a), flat 30% of the annual value of the property can be claimed as a deduction.

How to Claim Tax Benefits on Home Loans?

Claiming tax benefits on home loan is a simple process. Following are the steps to claim tax deduction:

  1. The tax deduction to be claimed is calculated using the help of online calculators or experts.
  2. Ensure that the agreement of the house is in your name or you are the co-borrower of the loan.
  3. Collect home loan certificate from the bank and submit it to your employer.
  4. The salary shall be adjusted against house property loss, if any, and tax deducted at source shall be adjusted accordingly.
  5. Post this, one should file tax returns either through an employer or authorised persons in this field.

How to Calculate Tax Benefit on Home Loan?

The simplest, fast and assuring way to calculate tax benefits on a home loan is by using an online calculator. One simply has to enter his or her home loan details and click on calculate. A detailed calculative table will pop up. The details required are:

  • Loan amount
  • Gross annual income
  • Tenure
  • Existing deduction under 80C/D
  • Loan start date
  • Interest rate

What Deduction can be Claimed for Joint Home Loan?

Generally, in the current times, a home loan is taken jointly. If the loan borrowed is a joint loan then each of the borrowers can claim the deduction on housing loan interest of up to INR 2,00,000/-.

The principal repaid on such housing loan shall be eligible for deduction under Section 80C up to INR 1,50,000/- by each loan holder. Stamp duty charges paid can also be claimed under Section 80C. However, apart from loan borrowers, they should also be the co-owners of the property purchased.

Frequently Asked Questions

What if the assessee has more than one house property?

If the assessee has more than one house property then at the option of the assessee, one of such properties shall be treated as Deemed Let Out Property.

Can benefits u/s 80C be claimed for commercial property?

No, benefits u/s 80C cannot be claimed for commercial property.

If the loan has been borrowed from friends and relatives, can it be claimed as deduction while calculating house property income?

No. Interest on home loan borrowed from banks and approved financial or credit institutions only can be claimed as a deduction if the loan is taken for purchase, construction, repair, renewal or reconstruction of the house.

Can interest on housing loan be claimed as tax deduction for a property under construction?

Yes, interest on such a property can be claimed as tax deduction. The interest as per the Act is termed as pre-construction interest, which shall be eligible for a period of five years.

From whom should the loan be borrowed for maximum benefit?

The loan should be borrowed from institutions such as banks, HFCs, Central & State governments, LIC, NHB, Public Company or a Public Sector Undertaking.

How to calculate pre-construction interest? Explain with an example.

Suppose, Soham took a home loan say on 01-Nov-2014, and the construction of the property gets completed on 1-Jun-2017. Pre-construction period is from 01-Nov-2014 to 31-Mar-2017

If the home loan interest paid for this period is 5 lakhs; it will be spread for a period of 5 years. One lakh will be treated as ‘Prior Period Interest’ and deduction of the same can be claimed in FY 17-18. Period from 1 Apr 2017 to 31 May 2017 is not considered as pre-construction period. It will be considered as the post-construction period

Under what section can pre-construction interest be claimed?

It can be claimed u/s 24(b) along with other interest.

When pre-construction interest is over and above the limit of INR 2,00,000 in case of self-occupied property, what is the take on tax deduction?

In case of self-occupied house property, this interest is allowed as deduction subject to a ceiling limit of INR 2,00,000.

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