Tax Benefits on Home Loan

Overview:

Buying your own home is really expensive and for some of us it’s a dream out of reach. But with a home loan, we can all achieve this dream whether it’s buying a house or constructing one. Home loans are a credit line bearing lower interest rates and long-term tenures so that you can pay the loan amount back with ease. An added bonus is that they are eligible for tax benefits too, so the burden is lesser on you while you repay your loan.

Tax Benefit 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 an 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.

Deductions under Section 80EE – For loans sanctioned between April 1, 2013 and March 31, 2014, an additional tax benefit is provided to first-time homeowners.

• The property should be valued at Rs. 40 lakh or less.
• The loan amount should be Rs. 25 lakh or less.
• This deduction can be claimed only in 2013-14 and 2014-15.
• You can claim up to a maximum of Rs. 1 lakh.

Tax benefit on second home loan:

If you plan on purchasing or building a second home, one property will be marked as self-occupied and the other will be deemed a let-out property. Both properties are eligible for tax benefits.

• 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 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

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.