Benefits of Housing Loan from Income Tax Perspective

December 21, 2015
Benefits of Housing Loan from Income Tax Perspective

When a home loan is availed for buying a house one has to repay the home loan in equal monthly installments (EMI). There are two parts of EMI one is ‘Interest’ Portion and other is ‘Principal’ portion.It means, when we pay-back home loan we are paying back a portion of interest and portion of principal. As we repay the interest and principal with each EMI the tax benefit are available on both the components under Income Tax act.

Tax Benefit on Principal Amount under section 80 C:

The amount paid as Repayment of Principal Amount of Home Loan by an Individual is allowed as tax deduction under Section 80C of the Income Tax Act.

The maximum tax deduction allowed under Section 80C is Rs. 1,50,000 only. This tax deduction of Rs. 1,50,000 is the total of the deduction allowed under Section 80C and includes amount invested in PPF Account, Tax Saving Fixed Deposits, ELSS Mutual Funds, LIC Policies etc.

Some Key Points to remember:

a) While buying a house one has to pay stamp duty and registration charges. One can claim deduction on these expenses under Section 80C of income tax in the respective year even if the home loan is not availed.

b) Not Allowed for under construction properties: The tax benefit of home loan under this section for repayment of principal part of the home loan is allowed only after the construction is complete and the completion certificate has been awarded.  The deduction is not allowed for an under construction property.

c) No Deduction and Tax Benefit if house sold before 5 years: As per section 80C(5) states that in case the person sells the house property before the expiry of 5 years from the end of the Financial Year in which the possession has been obtained by him, then no deduction and tax benefit on Home Loan shall be allowed under Section 80C. The total amount of tax deduction already claimed in respect of previous years shall be deemed to be the Income of such year in which the property has been sold and the person shall be liable to pay tax on such income.

Tax Benefit on Interest Amount under section 24

The maximum tax deduction allowed under Section 24 of a self-occupied property is subject to a maximum limit of Rs. 2,00,000/-. What is self occupied property? As per Section 23(2) of the Income Tax Act; the term self occupied property includes property that cannot be occupied by the owner due to his business or profession or employment, being carried on at any other place in a building that he does not own. What this means is that a self occupied property should be meant for your occupation and you need not be necessarily living there?

Tax Deduction on Self Occupied property example:

A person may own a house property, say in Bangalore, which he normally uses for his residence. He is transferred to Chennai where he does not own any house property and stays in a rental accommodation. In such case, the house property in Bangalore cannot be used for self-occupation and notional income therefore would normally have been chargeable although he derives no benefit from the property. To save the taxpayer from hardship in such situations, it has been specifically provided that the annual value of such a property would be taken to be nil subject to the following conditions:

The assessee must be owner of only one house property. He is not able to occupy the house property because of his employment, business etc. being away from place where the property is situated. The property should not have been actually let. He has to reside at the place of employment in a building not belonging to him [Section 23(2)(b)]. He does not derive any other benefit from the property not occupied.


Tax Deduction on let-out or deemed to be let-out property example:

 If the property is not self-occupied and is let-out or deemed to be let out [The property is vacant because of reasons other then property that cannot be occupied by the owner due to his business or profession or employment, being carried on at any other place in a building that he does not own] the total interest paid during that financial year can be claimed under Section 24B and this can also be set-off against your income from house property, your income from salary or business income.

The annual rental value will be the higher value of the following: actual rent received in a year; municipal value; and fair rent fixed by the Income Tax Department. Out of the total annual value, there is standard deduction of 30 per cent available on rental income towards rent collection and maintenance charges and municipal taxes, as well as insurance premiums paid on the property can be deducted.

Annual Rent                                                                              360000

(Minus) Municipal Tax                                                               10000

Net Value                                                                                     350000

(Minus) 24(a) Standard Deduction [30%]                             105000

(Minus) 24(b) Interest on borrowed capital                           300000             405000         

Income from House Property                                                                             (-) 55000                                                                  

In this case I purchased a house by taking a home loan; I rent out the flat at 30,000/- per month which is the fair rent for the apartment. I paid 10,000/- as municipal tax and paid an interest of 300,000/- for the year. In this case I have made a loss from the house property and the same would be set-off against my salary income. Isn’t this amazing! I have actually saved tax on the entire 300,000/- paid as interest amount and also have made a loss of 55,000/- which will also be deducted from my annual income.

Had it been the self occupied property I would be only eligible for a deduction of maximum 200,000/- on the interest amount under section 24(b).

Tax Treatment for an Under Construction Property: 

For an under construction property one cannot claim the deduction till the time construction is complete and possession is received.  Once the possession is received one can claim deduction for the interest paid during pre-construction period. The Interest that has been paid before the completion of construction is allowed as tax deduction in 5 equal installments for 5 successive Financial Years starting from the year in which the construction has been completed.

Tax Implication in case the property is jointly owned?

Joint borrowers, who have purchased property in joint name, are eligible for the tax rebate in the proportion to their share in the loan. In case of joint loans also, all the co-borrowers can get tax benefits. The maximum limit of Rs.2, 00,000 will apply individually to both of you (i.e. the total deduction will be limited to Rs. 4,00,000).   

It needs to be ensured that both should be co-owners of the property. A co-owner of a house must be a co-borrower as well. It is essential for a co-borrower to be a co-owner in order to claim tax benefits. You cannot get tax benefits if you are only a co-borrower and not a co-owner.

In case say me and wife pay Rs.400,000/- as interest and Rs. 100,000 as principal, each one us has an equal share in the borrowing, then each one of us can claim Rs. 200,000 towards interest (subject to maximum of Rs. 200,000) and Rs.50,000 towards principal in our respective income tax returns.

Home Loans come with Tax Rebates!



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