Tax Benefits On Home Loan

The Government of India offers tax benefits on home loans under Section 80C of the Income Tax Act, 1961. If the co-owners of a property apply for a joint home loan, then both the loan borrowers will be able to claim separate deductions.

The Interest Rate On Home Loans And The Tax Deductions Associated With It

Under Section 24 of the Income Tax Act, homeowners are allowed to claim a deduction to the extent of Rs.2 lakh on the interest rate applicable to their home loan. In case returns are being filed for the previous financial year, the cap on the deduction is Rs.1.5 lakh. However, to claim this benefit, the owner of the house or his/her family must live in the said house. The same deduction can be claimed in case the house remains unoccupied. In case the house has been let out to rent, the whole interest amount paid towards the loan can be claimed as a deduction.

A rebate of Rs.2 lakh is only given if certain conditions are met, otherwise your claim is capped at Rs.30,000. The conditions that must be met to claim a rebate of Rs.2 lakh are as follow:

  1. The loan has to be availed either prior to or on April 1, 1999.
  2. The loan should be availed for buying and constructing a new residential property.
  3. The time taken to buy or construct a property should be within three years from the completion of the fiscal year in which the money was borrowed.

In case a property is not completely constructed within three years from the completion of the fiscal year in which the loan was taken, the interest will be capped at Rs.30,000. For instance, if a loan was availed on September 11, 2014, the property must be completely constructed by March 31, 2018. However, Budget 2016 saw the three-year period extend to a five-year period, applicable from FY 2016-17. Rs.30,000 shall also remain the maximum amount that can be claimed as a deduction in case a loan has been availed for renewal, repairs, or reconstruction of a property.

If a loan is availed before the property is completely constructed, the borrower will not be allowed to claim a deduction on the interest applicable on the home loan when the property is still being constructed. A claim for deduction can only be made once the property has been completely constructed.

Self-Occupied Houses

A house is regarded as self-occupied if the taxpayer occupies it, or it has been occupied by his/her family members such as parents, spouse or children. In case an individual owns multiple house properties, only one property will be considered as self-occupied by the Income Tax Department. All the other properties will be considered as rented regardless of whether or not they are actually rented. As such, the calculation of rental income will be done on the basis of the rent a similar house in the same locality would fetch.

For instance, let’s say you buy a house jointly with your father, and borrow Rs.30 lakh for the same. Your father does not co-borrow the money with you, but resides with your mother in the house. Your EMI (Equated Monthly Instalment) is Rs.27,000, and it started in May 2017. Considering you earn no income under the head ‘income from house property’, as your parents reside in it, here’s how you can save tax on your home loan:

For FY 2017-18, your total EMIs will be Rs.27,000 x 11 months = Rs.2.97 lakh, which includes a principal payment of Rs.15,000 and interest worth Rs.2.82 lakh. Since you earn no income from the house property, and your claim for a deduction on the interest (Rs.2 lakh) sees a loss in your income tax return under ‘income from house property’, this loss can be subtracted from your taxable income in FY 2017-18. Moreover, a deduction under Section 80C can be claimed on Rs.15,000 (principal repayment amount). However, you will not be allowed to sell the house for five years, i.e. until the end of FY 2022-23.

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