Home loan tax benefits: Here’s all you need to know

Tax benefits by way of deductions from income are allowed against principal repayment and interest on a home loan, transfer charges, or any other charges incurred to purchase house property.

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While filing a return of income one must disclose income from all sources, irrespective of the amount.

To keep the housing sector of India afloat and keep the taxpayers encouraged for buying new homes, the Income-tax department has provided certain key benefits for availing of home loans. Tax benefits by way of deductions from income are allowed against principal repayment and interest on a home loan, transfer charges, or any other charges incurred to purchase house property.

Here are the key tax benefits available against home loans availed for purchase/construction of the house property.

Payments made towards the principal component

Payments made towards the principal component of the housing loan borrowed for the purchase/construction of the house property qualifies for deduction under the limit of Rs 1.5 lakh of Section 80C. However, this deduction will be reversed if the property on which deduction is claimed is sold within a lock-in period of 5 years from the date of purchase.

Also, any expenses incurred in respect to the stamp duty, registration charges, or any other charges directly related to the transfer of the property is allowed as a deduction under the overall limit of Rs 1.5 lakh of section 80C. This deduction is allowed only in the year of actual expenditure.

Section 24 (b) of the Income-tax Act allows the deduction of interest 0n borrowed loans for purchase/construction of a house property.

In respect of self-occupied residential property, a deduction of Rs 2 Lakhs is allowed against the interest incurred on the housing loan availed for acquisition or construction. However, the deduction amount allowed is reduced to Rs 30,000 (i) if the construction of the new house property is not completed within five years from the end of the financial year in which the loan is borrowed, and (ii) In case of the loan availed is for reconstruction, repairs or renewals of the self-occupied residential property

In respect of let-out/ rented property, actual interest incurred on loan availed for acquisition, construction, repairing, re-construction shall be allowed as deduction.

Pre-construction Interest
Pre-construction Interest or Interest pertaining to the period prior to the year of acquisition/ construction of the house property shall be allowed as a deduction in five equal installments, beginning from the year in which the property was first constructed.

The total deduction limit of Rs. 2 lacs shall apply for both pre & post construction period interest in case of self-occupied property. You can claim the pre-construction interest for a let-out property subject to the limits on set-off of loss arising from excess interest payments. You are eligible to set off house property loss only to the extent of Rs 2 lakh in the current year against income under any head. The balance loss needs to be carried forward to the next eight years.

Section 80EE

  • Section 80EE was introduced from FY 2017-18 as an additional deduction up to Rs 50,000 as against the interest payable on loan taken for the purpose of acquisition of a house property subject to the following conditions:
  • The loan has been sanctioned by Financial institution during the financial year 2016-17
  • The amount of loan sanctioned is less than Rs 35 Lakhs
  • The value of the residential property does not exceed Rs 50 Lakhs
  • The assessee is the first time owner of the house property as on the date of sanction of loan
  • If any deduction is claimed under this section, no deduction shall be allowed of such interest under any other provision.

The interest deduction under section 80EE is available until the repayment of the loan, subject to satisfying the above conditions. The interest deduction continues to be available for an individual whose loan was sanctioned within the limits and conditions prescribed in section 80EE.

Section 80EEA
Section 80EEA has been further introduced from FY 2019-20 also to extend and enhance the benefits allowed under Section 80EE for low-cost housing.

  • This section allows an additional deduction up to Rs 1,50,000 for interest payable on home loan taken subject to the following conditions:
  • The assessee must be an individual.
  • The loan is sanctioned by the Financial institution or housing finance company between 1 April 2019 and 31 March 21 (one-year extension granted beyond the 31 March 2020 in Budget 2020)
  • The value of the residential property does not exceed Rs 45 Lakhs.
  • The assessee is the first time owner of the house property as of the date of sanction of loan.
  • The individual should not be eligible to claim interest deduction under section 80EE.

Please note, A deduction for interest payments under Section 80EE and 80EEA as mentioned above is in addition to the deduction of Rs 2 lakh available under Section 24 of the Income Tax Act. To avail maximum benefit of these deductions, the deductible limit of Rs 2 Lakh under Section 24 should be exhausted first. Then one should go on to claim the additional benefits under Section 80EE/ 80EEA. Therefore, taxpayers can claim a total deduction of Rs 3.5L for interest on the home loan, if they meet the above conditions of section 80EEA and Rs. 2.5 lakhs in case they meet conditions of earlier introduced section 80EE.

In case of joint ownership of the house property wherein the home loan is also sanctioned jointly, all the joint borrowers are eligible to claim the deduction u/s 24 for interest payment up to Rs 2 lakh and deduction under section 80EE/80EEA, as the case may be. Further, each joint owner can also claim deduction under section 80C for principal component repayment up to Rs 1.5 Lakh in their tax return individually. The benefits of interest deduction and repayment of housing loans are available to both residents and non-residents Indians.

by Archit Gupta, Founder, and CEO – ClearTax

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