Home buyers are not aware about the tax benefits or tax deductions on home loan that can be claimed while filing Income Tax returns. These deductions can be divided into 2 parts:
- Repayment of the Principal Amount
- Repayment of the Interest on Home Loan
- Tax benefit on Home Loan for Payment of Principal Amount (Section 80C):
The amount paid as Repayment of Principal Amount of Home Loan by an Individual / HUF 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. This tax deduction is the total of the deduction allowed under Section 80C and includes amount invested in PPF Account, National Savings Certificate, Premium on Life Insurance, etc.
However, it should be noted that if the assessee transfers the house property on which he has claimed tax deduction under Section 80C 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 aggregate amount of tax deduction already claimed in respect of previous years shall be deemed to be the Income of the assessee of such year in which the property has been sold and he shall be liable to pay tax on such income.
- Thus it is recommended not to sale house property within 5 years otherwise tax deduction claimed earlier will have to be paid.
The amount paid as Stamp Duty & Registration Fee is also allowed as tax deduction under Section 80 C even if the assessee has not taken loan.
- Tax benefit on Home Loan for Payment of Interest Amount
Tax Benefit on home loan for payment of Interest on home loan can be claimed as deduction under Section 24 as well as under the newly inserted Section 80EE
- A) Income Tax Benefit on Interest on Home Loan (Section 24):
Tax Benefit on Home Loan for payment of Interest is allowed as a deduction under Section 24 of the Income Tax Act. As per Section 24, the Income from House Property shall be reduced by the amount of interest paid on home loan where the loan has been taken for the purpose of Purchase/ Construction/ Repair/ Renewal/ Reconstruction of a Residential House Property.
It should be noted that interest deduction u/s 24 is allowable on accrual basis i.e. it can be claimed even if not paid. Further, (to add cherry on the top) this deduction can be claimed for two or more housing loans also.
If the property is purchased jointly in the name of 2 (or more persons) and joint home loan is taken for which interest is paid by joint holders then deduction can be claimed by joint holders in the ratio of ownership.
However, if the property is not acquired/constructed completed within 3 years from the end of financial year in which the loan was taken, the interest benefit in this case would be reduced from 2 Lakhs to Rs 30 thousand only. With a view to provide maximum benefits to public and considering genuine hardship on them, this limit of 3 years has been increased to 5 years from Financial Year 2016-17 and onwards.
Income tax Treatment of Pre-construction Interest
In many cases, amount is paid for the purchase of property even before the construction is completed. Some home buyers, purchase properties on loan before the completion of construction and start paying EMI to the Bank. In such cases, Section 24 very specifically states that Tax Deduction for payment of interest shall not be allowed before the construction is complete.
In such conditions:
- If Loan is taken for purpose of Repair/ Renewal/ Reconstruction: No Tax Deduction allowed for interest paid before completion.
- If Loan is taken for Purchase/ Construction: The interest that has been paid before the completion of construction should be aggregated and the whole aggregated amount shall be allowed as tax deduction in 5 equal instalments for 5 successive Financial Years starting from the year in which the construction has been completed.
Thus, benefit of deduction of interest paid can be claimed for pre-construction period also for new house property.
Section 80EE: Income Tax Benefit on Interest on Home Loan
Honourable Finance Minister while announcing the Budget 2016 has reintroduced Section 80EE which provides for additional deduction of Rs. 50,000 for Interest on home loan. This deduction would be over and above the tax deduction of Rs. 2,00,000 under Section 24 & Rs. 1,50,000 under Section 80C and would be available from Financial Year 2016-17 onwards till the time the repayment of the loan continues. However to avail this deduction all the following conditions are to be satisfied:
- The value of the property purchased does not exceed Rs. 50 Lakhs,
- The loan amount is upto Rs. 35 Lakhs,
- The loan should have been sanctioned during the period starting from 1st April, 2016 and ending on 31st March, 2017.
The above 3 Sections pertaining to Tax Benefits on Home Loans explained in tabular format.
|Particulars||Deduction Amount (Rs.)|
|Section 80C||Stamp Duty and Registration charges paid.|
Disclaimer: The above blog is published in line with recent changes in Finance Act - 2016. A tax deduction under Section 80C, Section 80EE & Section 24 may differs depending on the income and amount of loan taken and interest there on (Max upto 4 Lakhs). Please refer your tax consultant for more information.