Tax Benefits on Home Loan

Although beneficial in purchasing a hose, home loans are an expensive affair. Nevertheless, there are benefits one can enjoy benefits associated with obtaining a mortgage. Home loan tax benefits are one of the upsides of a housing loan. Tax rebates can be availed on a housing loan which will reduce an individual’s tax burden, which will in turn reduce the burden on the housing loan.

What are the tax rules on Home Loan Tax Exemption? [Budget 2018-2019]

Based on the current rules, owners of properties that are rented out can deduct up to Rs.2 lakh p.a. on the housing loan after adjusting the rent earned. Any amount over and above Rs.2 lakh can be carried forward for eight assessment years.

Individuals who have availed a housing loan and have occupied the same property are entitled to deduct up to Rs.2 lakh on interest paid towards the home loan.

Also, if a property is sold within 3 years of purchase, the profit earned from the transaction will be considered as a capital gain and will be taxed as per the slab he/she falls under.

Highlights of New Tax Rules on Home Loan Tax Benefits:

  1. Budget proposes to cut tax benefits borrowers enjoyed on property on rent
  2. Borrower can claim Rs. 2 lakh deduction after adjusting for rental income
  3. The amount above Rs. 2 lakh can be carried forward for 8 assessment years

What are the Tax Benefits on Home Loan?

Home loans are eligible for tax benefits under three sections of the Income Tax Act. Your home loan consists of two components: Principal and Interest. You may be eligible to claim tax benefits for these components based on certain criteria. Firstly, you must be the owner, or a co-owner and co-borrower in the case of joint home loans.

Principal amount under Section 80 C - An Individual or a HUF (Hindu undivided family) can claim tax benefits on the principal repayment of a loan.

  • Stamp duty and registration charges are also eligible for deductions.
  • Life Insurance Premium, NSCs, EPF, ELSS can be claimed along with the home loan, subject to an overall deduction of Rs. 1 lakh in a year.
  • Commercial property and home renovations or additions on existing property is not eligible under Section 80C.
  • The loan should be taken from banks, HFCs, Central & State governments, LIC, NHB, Public Company or a Public Sector Undertaking.

Interest payment under Section 24(b) – it allows for tax deduction on interest payable on a loan taken to buy or construct a house.

  • You can also claim this benefit for repair or reconstruction of an existing property.
  • Processing fees and prepayment charges will also be treated as interest payment.
  • This benefit is available for residential and commercial property as well.
  • Owners of let-out properties can claim full interest payment, but exemption for self-occupied properties is restricted to Rs. 1.50 lakhs per annum.
  • This tax benefit is also applicable for loans taken from friends and family.

Deduction for Joint Home Loan - If the housing loan is availed by two or more persons, each of them is eligible to claim a deduction on the interest paid up to Rs.2lakh each. Tax can be deducted on the principal paid as well for an amount up to to Rs.1.5 lakhs each. However, all the applicants should also be co-owners of the property in order to claim this deduction. Therefore, a joint loan can give you greater tax benefits.

Home Loan Tax Deduction Details
Deduction Section Maximum Deduction Conditions
Principal 80c Rs.1.5 lakh Property should not be sold within 5 years of purchase
Interest 24b Rs.2 lakh Loan must be availed for purchase or construction and the property must be constructed with 5 years of availing the loan
Interest 80e Rs.50,000 Loan amount should not exceed Rs.35 lakh and the property value should not exceed Rs.50 lakh
Stamp duty 80c Rs.1.5 lakh This benefit can be availed only on the year that the stamp duty expenses are paid

Home Loan Tax Exemptions for first time homebuyer

You can avail the tax benefits on home loan for both the principal and interest paid. Principal repayment qualifies for tax deduction under section 80C of the Income-tax Act, 1961. However, other things such as life insurance premiums, investment in Public Provident Fund, and children’s education fee that qualify for deduction under the same section. All of these should not exceed Rs.1.5 lakh. Apart from principal repayment, you can claim deduction of up to Rs2 lakh for interest payment on home loans under section 24(b) of the Act.

However, if you are a first-time homebuyer, you can claim additional tax deduction of up to Rs50,000 per financial year under section 80EE of the Act, provided you fulfil certain conditions.

What are the Tax Benefits on a Second Housing Loan?

One is eligible for tax rebates on home loans on availing a mortgage for purchasing or building a second home. In this case, one property will be regarded as a self-occupied property, while the other will be considered a let-out property. One is eligible for tax benefits on home loan in both these cases.

Home Loan Tax Benefits on the let-out House:

  • For the let-out house, you can claim deductions only on the interest payment.
  • There is no restriction on the maximum amount.
  • Taxes paid to the local authorities, namely municipal taxes can be filed for tax deductions in the financial year in which they are paid.
  • 30% of the annual value of the property is eligible for deductions for repair and maintenance charges.

How to claim Tax Benefits on Home Loans?

Claiming tax benefits on home loan is a simple process. Below are the steps to claim your tax deduction.

Step1: Calculate the tax deduction to be claimed.

Step2: Ensure that the house is in your name or you are the co-borrower of the loan.

Step3: Submit your home loan interest certificate to your employer to adjust the tax deductible at source.

Step4: In case you don’t perform the above step, you would have to file the tax return by yourself.

Step5: In case you are self-employed, you are not required to submit these documents anywhere. Just keep them handy if in case the IT department raises queries in the future.

How to calculate Tax Benefit on Home Loan?

The easiest way to calculate your tax benefits on home loan is by using an online calculator. Simply enter your home loan details and click on calculate and a detailed tabulation will pop up. The details you will generally need are:

  • Loan amount
  • Tenure
  • Interest rate
  • Loan start date
  • Gross annual income
  • Existing deduction under 80C/D

Tax Benefits on Housing Loan (FY 2017-2018)

  • On the principal amount, Rs.1.5 lakh can be claimed as tax benefit under Section 80C of the Income Tax Act. For senior citizens, the claim can go up to an amount of Rs.2 lakh.
  • Rs.2 lakh tax deduction can be claimed on the interest amount provided the construction of the property is completed within a period of 5 years from the disbursement date of the home loan. Senior citizens can claim a tax deduction of Rs.3 lakh under this category.
  • For a property that is under construction, no deduction can be claimed on the principal amount.
  • In interest amount can be claimed in equivalent parts in 5 financial years after the completion of the property construction. The annual limit of the claim stands at a maximum of Rs.2 lakh.
  • For a second home or an additional property, no tax deduction is available on the principal amount.
  • Exemption of the interest is capped at Rs.2 lakh or actual interest amount paid for all the properties that are owned by the taxpayer, whichever is lower.

Tax benefits on Housing Loan (FY 2016 – 2017)

  • Rs.2 lakh can be claimed as seduction for a self-occupied property. Self-occupied suggests that you stay in that house with your family. Even if you do not stay there, your family must reside in that house to call it self-occupied.
  • Section 80EE tax benefits – An additional amount of Rs.50,000 can be claimed as tax deduction on the home loan interest rate. To claim this deduction, certain conditions must be met:
    • The total loan amount must be less than Rs.35 lakh.
    • The total value of the property must be less than Rs.50 lakh.
    • As on the sanction date of the loan, taxpayer must not own any other property.
    • The loan must be borrowed from housing finance companies, RBI licensed banks or co-operative banks.

FAQs:

  1. Can I claim tax benefits if I3plan on constructing the house and selling it in a few years?

    If you sell the property within 5 years of possession, any tax deductions already claimed will be reversed. However the tax exemptions on interest paid will remain unchanged.

  2. Who is eligible to claim tax deductions on home loans?

    The owner of the property can claim tax benefits. If the spouse is a co-borrower, they can also file for tax deductions. In the case of a joint loan, both parties can claim for their share of the loan they pay.

  3. The property I purchased with a home loan is still under construction. Can I claim tax benefits?

    You cannot claim tax deductions till the construction is completed. Once it is completed, you can claim an aggregate of interest paid for the period prior to the year of taking possession. This can be claimed in five equal instalments from the year in which construction is completed.

  4. Can I claim tax benefits on loans from friends?

    You can claim for tax deduction under Section 24(b) only for the interest paid. The friend will have to provide you with a certificate and will be liable to pay tax on the interest earned from the loan.

  5. Can I claim tax benefit on two home loans?

    Generally, tax benefits can be availed only on the house claimed as self-occupied. In case if you own two houses, only one of them can be claimed as self-occupied property. The other house will be considered as a let-out property and will be taxed as per the tax slab applicable. The notional rent on your second house will be added to your income. To save on the applicable tax, one can consider investing the second house in his/her spouse’s name. However, only one residential property can be relieved from being taxed. You will have to pay wealth tax on the second home.

  6. Can my spouse claim income tax deduction if we buy a house jointly?

    Yes, you can claim separate deductions in your IT returns if your spouse is employed and has a different source of income. You can both claim deduction under Section 80C up to Rs.1.50 lakh from your total income. If the house is jointly owned, each co-owner can claim deductions up to Rs.2 lakh on account of the interest on borrowed money. However, if the house is being rented, there is no restriction on the claiming amount and you can individually claim deductions based on the ratio of possession on the property.

  7. Is the Home Loan principal part of Section 80C?

    Yes, home loan principal is part of Section 80C of the Income Tax Act. Under this section, an individual is entitled to tax deductions on the amount paid as repayment of the principal component on the housing loan. An amount up to Rs.1.50 lakh can be claimed as tax deductions under Section 80C. However, the tax benefit on the repayment of the principal amount can be claimed only after the house is constructed. The section does not allow deductions for the repayment of the principal part during the years the house was being constructed.

  8. Can I claim tax benefits from a home loan while claiming House Rent Allowance (HRA)?

    An individual is entitled to the following benefits if he/she is staying in a rented place after buying a home loan:

    • House Rent Allowance (HRA) benefit
    • Tax benefit on the interest amount paid under Section 24
    • Tax benefit on principal amount repaid under Section 80C

    The Housing Rent Allowance benefit stops once the construction of the property is complete. You can avail all tax benefits on the housing loan only if the construction of property has been completed and is ready to move in during the same financial year. You can still claim tax benefits if you are living in a rented accommodation after giving your house on rent. However, the rent you receive on the property will be added to your taxable income and will be taxed as per the applicable tax slab.

  9. Can self-employed individuals claim Housing Rent Allowance (HRA) benefit?

    No, self-employed individuals cannot claim Housing Rent Allowance (HRA) benefit. However, you can save tax on the house rent paid under Section 80GG of the Income Tax Act, provided the rent has not been claimed under another section of the IT Act.

  10. Are there any other tax deductions I can claim with respect to interest payment on the home other than the interest under Section 24(b)?

    You can also claim tax deductions in respect of the interest on the housing loan under Section 80EE of the Income Tax Act. Under this section, an individual is entitled to claim tax deductions up to a maximum amount of Rs.50,000 during a financial year. The deductions, however, cannot be claimed if you have repaid the entire home loan. You can claim tax benefits under Section 80EE if you haven’t purchased a house before. The value of the house should not exceed Rs.50 lakh and the home loan taken for the property should be less than Rs.35 lakh to avail this benefit.

  11. Can I claim tax benefit on the principal repaid on a housing loan?

    Yes, you can avail tax benefits on the principal amount repaid on the home loan from total income under Section 80C. However, you can only claim tax deductions up to a maximum amount of Rs.1.50 lakh under this section.

  12. What is maximum amount I can avail for deduction of interest paid on my housing loan?

    Under Section 24 of the Income Tax Act, an individual can claim tax deduction of the interest payment on the housing loan up to a maximum amount of Rs.2,00,000. However, there is no limit on the interest payment deduction of the property is rented.

News About Tax Benifits on Home Loan

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