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ULIP INSURANCE

Tax Deductions That Can Be Availed for Reconstructing a House

Jagrity Sharma Jagrity Sharma 02 January 2020

Homeowners are eligible for income tax deductions if they have taken a home loan to repair or reconstruct their house. This income tax deduction can be availed for self-occupied homes as well as property that has been rented out. Read on to know more.

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Every house needs maintenance. No matter how well-constructed it is, it will eventually require some form of repairing.

The repairs can range from small plumbing issues to extensive issues such as painting the exterior walls, reconstruction of the roof, re-flooring the entire house, and so on. Even if no repair work is needed, you may need to renovate your interiors after a few years. Such costs are an integral part of the house-owning experience and are largely unavoidable. To ease the burden on homeowners, certain income tax deductions are available for loans that have been taken for home improvement.

Banks provide a special loan to repair, reconstruct or renovate a house. The interest that you need to pay on such loans is eligible for income tax deductions. Here, we have discussed the kinds of income tax deduction that you can avail for home improvements or reconstruction.

Income from House Property

Under the Income Tax Act, incomes from different sources are categorized into various headings. The deduction under each category is different. Income from house property is one such category.

Home loans are eligible for deductions if the home loan has been taken for the reconstruction or repairing of your house. First, we should understand what income from house property means.

For the Income Tax Act, you have income from house property if you have:

  1. Rented out property which you own.

  2. Any property which you own, but have not rented out and are not occupying yourself. The Income Tax Act deems that you have income from such a property which is equivalent to the reasonable rental market value of the property for each year.

If you own a house and are occupying the house yourself, then you have no income from house property with such property. If you own one property but are residing somewhere else for the purposes of business or employment, then such property is also deemed to not generate any income under the Income Tax Act, 1961.

The following income tax deductions can be claimed out of income from house property.

Standard Deduction

Standard deductions are a flat rate of income tax deduction which you are eligible for irrespective of your expenses relating to a certain income source. The standard deduction on income from house property is an income tax deduction which can be claimed even if you have not incurred any expenditure in the form of repairs, insurance, water supply, electricity or any other type of expenditure.

A standard deduction of thirty percent of your entire deemed income from house property is available to income taxpayers. For example, if you have a house property which you have rented out, and are receiving Rs. 10,00,000 per year as rent for that property, then you can claim an income tax deduction of Rs. 3,00,000 from that income to compute your income tax.

If you own a house property, but are occupying the house yourself, then you cannot claim any income tax deduction since your income from the house property is considered to be nil. You must have income from house property in order to claim an income tax deduction in the form of a standard deduction while filing your income tax returns.

Deduction for Reconstruction of House

For self-occupied house- You can claim an income tax on home loan for reconstruction or renovation of your self-occupied house. This income tax deduction is available on the interest which you have to pay on your home loan and not on the principal amount of the loan. The amount of income tax deduction which you can claim is a maximum of Rs. 2 lakhs.

An income tax deduction of a maximum of Rs. 2 lakhs can be claimed if:

  1. The home loan which you have taken is specifically for the reconstruction or repair of your house.

  2. The home loan must have been taken on or after 1st April, 1999.

  3. The reconstruction or repair of the house must be completed within a maximum period of five years from the date on which the home loan was taken.

You are eligible for an income tax deduction of Rs. 2 lakhs only if all of the above conditions are satisfied and your family or you yourself occupy the home.

If you do not satisfy any of the above conditions, you can still claim an income tax deduction of up to a maximum of Rs. 30,000 for a self-occupied house.

In order to claim this income tax deduction, you must have a certificate from the bank that gave you the home loan, which specifies why the loan has been taken and the interest that is payable on it.

For Rented house- If you are undertaking repair or reconstruction of a house which is not self-occupied but has been rented out, you can also claim an income tax deduction. The income tax deduction does not have a limit and will be for the entire amount of interest which is payable on your home loan.

If the house has more than one co-owner, they can claim the above income tax deductions separately and independently from each other.

Deduction for Construction of a House

If you have taken a loan for the purchase or construction of a house, you can claim an income tax deduction on the interest which is payable on the loan before the construction of the house begins. This income tax deduction is separate from the income tax deduction, which is available for the repair or reconstruction of a house. You can claim a total income tax deduction of Rs. 2 lakhs on the interest payable on the home loan.

Conclusion

This income tax deduction is a boon for Indian homeowners. Since the repair and reconstruction of a house can be expensive, such deductions are a boon. Repair and reconstruction of a house is a costly and inevitable affair, and the need for such a deduction is widely felt. It should be noted that such a deduction is not available for the installment of luxury fittings. This deduction is meant to help homeowners undertake necessary repair-work and renovation for their house.

Jagrity Sharma
Written by Jagrity Sharma
A bibliophile who hates alliterations, but loves cream, comics and content immensely! On another note, a content marketer who leverages the power of words to explain...almost anything!