Tax Benefits on Home Loan

Taking a home loan can help you save tax as per the provisions of the Income Tax Act, 1961. Even more so after the announcements made during the latest financial budget 2019. While a housing loan can help you get a house for yourself, it can also turn out to an expensive affair. But the various tax benefits that come with such a loan help you save money every year. Take a look at how you can make the most of these benefits.

Benefits in a Nutshell [Budget 2019-2020]

The following table gives you the tax benefits under the corresponding sections of the Income Tax Act, 1961.

Section Nature of Tax Deduction Maximum Tax Deductible Amount
Section 24 Interest Rs.2 lakh (for self-occupied house) No limit (for let-out property)
Section 80C Principal (including stamp duty and registration fee) Rs.1.5 lakh
Section 80EE Additional interest (for first-time buyers) Rs.50,000

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

Home Loan Tax Benefits under Section 24 – Interest Deductions

This section deals with the yearly deductions related to the interest you pay on your property loan. The relevant details are given below:

  • If your property is a self-occupied one, you can claim a maximum deduction of Rs.2 lakh.
  • If you let your property out on rent, you can claim any amount you’ve actually paid as interest. There is no limit.
  • If you’re a co-borrower and also co-owner of the house, you can each claim up to the maximum deductible amount under this section.
  • The Rs.2 lakh deduction applies only if you complete the property (for construction) within 5 years. If the construction is not completed within this period, you can claim only up to Rs.30,000.
  • If the property is given on rent, you can claim any amount actually spent as interest, whether it is completed or not.

Home Loan Tax Benefits under Section 80C – Principal Deductions

Section 80C deals with the principal amount deductions:

  • For both self-occupied and let-out properties, you can claim up to Rs.1.5 lakh every year as a deduction.
  • You also need to complete the construction of the property and only then claim the deduction.
  • To claim this deduction, you should not sell your house within 5 years after possessing it.
  • If you sell your house within 5 years after possession, any deduction claimed will be reversed in the year in which you sell it. This amount will also be added to your income for the year of sale.
  • If you are a co-borrower and co-owner, you can each claim up to Rs.1.5 lakh as principal deduction.
  • You can also claim the stamp duties and registration fees paid for your property under this section.

Tax Benefits under Section 80EE – Additional Interest for First-Time Buyers

If you’re buying a house for the first time, you can claim the following interest deduction in addition to the benefits already mentioned above under Sections 24 and 80C:

  • You should have taken the loan between 1 April 2016 and 31 March 2017.
  • Your property must be valued at less than Rs.50 lakh.
  • The amount of home loan you take must be less than Rs.35 lakh.
  • You can claim an additional interest amount of up to Rs.50,000 every year till you repay the loan.

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.2 lakh 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 Benefits of Owning a Second Property

As per the current provisions, if you have more than one self-occupied property, then only one of them will be accepted as self-occupied. For the other property, you will have to pay tax on the basis of notional rent. You can choose either of your properties as the self-occupied one to maximise tax benefits.

As per the finance budget announced in February 2019, it was proposed that the second self-occupied home can also be claimed as a self-occupied one instead of it being deemed to be let out on rent. This will prevent the incidence of paying tax based on notional rent, helping the owner save money. It will also help you claim tax deductions for the second property as well.

HRA and Tax Benefits

Imagine a situation where you are staying in a house on rent and have also taken a home loan for your own property. In such cases, you can not only claim tax deductions on your loan, but also claim House Rent Allowance (HRA) deductions on the rent you’re paying. However, note that you can claim this deduction only if you live in the house you’ve rented. You cannot make a claim even if your dependent family members are staying in it without you. You can claim HRA depending on the lowest value of:

  • The actual HRA you receive from your employment.
  • 50% of your salary if you live in a metro city or 40% if you live elsewhere.
  • The actual rent minus 10% of your salary.

Remember these when you file your taxes for the year.

Now that you know what tax benefits you get when you take a property loan, make sure you use them to your advantage and save as much money as you can.

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 Benefits 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.
  1. Can I claim tax benefits if I plan 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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