Income Tax Returns (ITR) filing: How housing loan can help you reduce your tax liability

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January 15, 2018 11:23 AM

Under various provisions of the Income Tax Act, a housing loan can help an individual reduce his/her tax liability to a large extent. Here's all you need to know.

Income Tax Returns (ITR) filing, ITR filing, housing loan, home loan, reduce tax liability, income tax act, Self-occupied property, let out property, Deemed let out propertySection 80EE of the ITA provides for deduction of interest on home loan taken for a residential house property.

Amidst the snowballing challenges associated with owning your own house property, on a brighter annotation, one needs to understand the noteworthy income-tax benefits provided by the Government of India to boost the morale of the individual home buyers contemplating buying or constructing their own home. This article primarily seeks to encapsulate the associated tax benefits available to an individual home buyer under the provisions of the Income-Tax Act, 1961 (ITA) with respect to the house property loan borrowed by such individuals under various scenarios:

1) Tax incentives available in relation to the interest paid on house property loan:

Under the relevant provisions of the ITA, a house property can be broadly classified into the following:

# Self-occupied property –

House property occupied by an individual for own residence; and includes a property which could not be occupied by an individual owing to his employment, business or profession.

# Let out property –

House property which has been given on rent by an individual for whole or part of the tax year, either for the purpose of residence or business.

# Deemed let out property –

When an individual owns more than one house property and not being utilised for any purpose (neither for self nor let out), then as beneficial to the taxpayer, either of property could be construed as “Self-occupied” and other as “Deemed let out”. Tax treatment of “Deemed let out” property is similar to that of “Let out” property.

The deduction available towards interest paid on the above-mentioned properties is as below:

Nature of property

Deductions available towards interest paid on house property loan

Self-occupied house property

Annual interest accrued subject to a maximum deduction available of INR 200,000 during a tax year.

However, if the individual has taken the loan before 01 April 1999 or the period of construction exceeds five years from the end of the financial year in which the loan is taken, the maximum deduction amount is restricted to INR 30,000.

Deduction of interest cannot be claimed when the property is under construction. The interest paid by an individual during the pre-construction period can be claimed in 05 equal installments starting from the year in which the construction is completed or the property is acquired. The period from when the individual has obtained the loan until when the construction of the house is completed is referred to as the “pre-construction” period. The ceiling limit of INR 200,000 is inclusive of both pre-construction interest and the current year interest.

Let out property

Entire interest on let out properties can be claimed as a deduction; subject to maximum deduction available of INR 200,000 during the tax year.

Deemed let out property

Same as Let out property.

2) Tax incentives available in relation to the repayment of principal loan amount:

As per Section 80C of the ITA, an individual can claim deduction of principal repayment of housing loan amount subject to a maximum overall deduction of INR 150,000 during the tax year, from the total taxable income of the taxpayer. However, in case, the individual transfers the possession of the said house property within five years in respect to which the deduction has been claimed, the deduction claimed in any of the earlier years will be added back to the income of the taxpayer in the year of transfer.

3) Tax incentives available in relation to payment of registration charges and stamp duty:

In addition to the above, as per Section 80C of the ITA, an individual can claim deduction of stamp duty, registration fee and other incidental expenses with the purchase or construction of the house property subject to a maximum overall deduction of INR 150,000, from the total taxable income of the taxpayer. Further, the restriction on transfer of property within 5 years as mentioned in point 2 above shall apply mutatis mutandis in respect to this deduction as well.

4) Tax incentives available to an individual who does not hold any other property as on the date of sanctioning of such loan:

Section 80EE of the ITA provides for deduction of interest on home loan taken for a residential house property. The said provision has been substituted by the Finance Act 2016 effective from tax year 2016-17 which now provides that an individual is eligible to claim deduction of interest on house property loan under this Section subject to fulfillment of the following conditions:

# Loan was sanctioned during the period 01 April 2016 till 31 March 2017;

# The amount of loan sanctioned does not exceed INR 3,500,000;

# The value of house property does not exceed INR 5,000,000; and

# The individual does not own any residential house property on the date of sanction of loan.

If the aforementioned conditions are fulfilled, then the individual is entitled to claim deduction towards interest paid on such housing loan amount subject to a maximum deduction of INR 50,000.

Let us understand this by way of an illustration:

# Loan sanctioned – INR 3,500,000;

# Date of loan sanctioned – 01 March 2017;

# Purchase value of HP – INR 5,000,000;

# Annual interest accrual to the bank – INR 250,000; and

# No other residential HP was owned by the individual.

In this case, the individual would be eligible to claim the interest deduction for tax year 2017-18 as follow:

# Under Section 24(b) – maximum claim of INR 200,000; and

# Under Section 80EE – maximum claim of INR 50,000

It is pertinent to note that in case an individual has claimed deduction under any other Section of the ITA towards such interest on housing loan, then the taxpayer cannot claim deduction towards the said interest sum under this Section. Further, the deduction available under Section 80EE is in addition to INR 200,000 which is provided in computing income from self-occupied property.

5) Other incentives:

In case of jointly-owned house property, wherein loan has been borrowed jointly by two or more individuals, all the aforementioned tax benefits (points 1 to 4) would be available in the hands of each co-borrower.

Conclusion: In light of the above, individuals planning to buy or those who have recently purchased a house property in India should consider undertaking a thoughtful exercise towards structuring their tax liability efficiently and seek to effectively lower the interest burden.

Further, considering the amendment made by the Finance Act 2017 wherein the government has put restriction on total house property loss eligible for set off in a given tax year with no corresponding benefit, it is to be seen whether the government may consider revisiting the provisions or make available benefits provided earlier for let out properties or introducing related tax benefits to provide a boost to the housing sector.

(The author is National Leader Tax – Grant Thornton India LLP. CA Sudeep Das also contributed for this article.)

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