The government wants you to own a house and the same becomes evident from the various tax benefits allowed under the income tax laws to the persons who own a house. Let us understand the various beneficial tax provisions which prove that the government wants you to own a house.
As per Section 80C of the Income Tax Act, 1961, an individual and a Hindu Undivided Family are entitled to claim deduction upto Rs. 1.50 lacs in respect of principal repayment of the home loan, taken for the purchase or construction of a residential house. The loan should have been taken from specified institutions like bank, housing finance company, central government, state government , local authority or even a public limited company which is your employer.
For claiming these benefits the house should be complete and possession should have been taken by you. So for an under construction house at the end of the year, you cannot claim this benefit.
The government wants you to continue to own the house is evident from the provision of Section 80C(5) which requires you to retain the house and not to sell it before completion of five years from the end of the year in which possession of the house is taken. In case you sell the house before completion of five years no tax benefits shall be available for the year in which you sell the house. Moreover all the tax benefits claimed earlier by you on such house shall be reversed in the year in which you sell the house and it shall be treated as income of the year. There is no such reversal provision in case you prepay the home loan even before completion of five years. So the government does not mind you prepaying the home loan but does not want you to trade in the house.
Section 80C also allows you deduction within the overall limit of Rs. 1.50 lacs in respect of payment of instalment or part payment of the amount due to any company or cooperative society where you are a shareholder or a member for amount outstanding in respect to cost of the house allotted to you by such company or cooperative society. Deduction is also available for payment of amounts due to any housing board, or any development authority towards purchase consideration for such house purchased under any scheme of these authorities for construction or purchase of a house.
It is not only the principal repayment of the loan which is allowed under section 80 C, even any amount paid by you towards stamp duty, registration charges or transfer charges are also eligible for the tax benefits. The deduction in respect of these amounts is available only if the possession of the house is taken during the year. So even if you take possession of the house on 31st March of the year, you can claim the tax befits of under Section 80 C for home loan repayment, cost payment as well as stamp duty and registration charges.
Under Section 24(b) of the income tax act, you are allowed deductions for interest paid on money borrowed for purchase, construction or even repair, renovation of the house. This deduction is available from the year in which the construction of the house is completed and possession taken in case of an under construction property. The quantum of deduction will depend on whether the house is self occupied or let out. In case of let out property full interest is allowed to be deducted. However in case of self occupied house property the amount of deduction shall be restricted to Rs. 2 lacs generally. However in case of an under construction house if the construction is not completed within a period of three years from the end of the year in which the amount of the loan was disbursed, the quantum of deduction shall stand restricted to Rs. 30,000/- in a year. Looking at the usual delay in completion of the construction of the house in the country and in order to give relief to the tax payers the government, in the current budget of 2016, has proposed to extend the period of completion of the construction of the house from three years to five year.
For claiming interest deduction it is not necessary that the loan has to be taken from specified institutions as is required for claiming deduction for loan repayment. Even interest paid to friends and relatives also qualify for this deduction as long as you are able to establish the linkage between the money borrowed and its end usage for the house purposes.
Since the deduction is available from the year in which the construction of the house is completed and possession is taken a question may arise as to what happens to the interest paid before completion of the construction. The law has provided for it. You can claim such interest, which is generally referred to as Pre EMI interest, in five equal instalments from the year in which construction of the house is completed. The overall deduction is restricted to Rs. 2 lacs in case the house property is self occupied. Here also the law requires you to continue to own the house for at least for five years failing which the claim for Pre EMI interest not claimed shall lapse for the remaining years.
a) Section 80EE – Dedution amounting to Rs 50,000 is allowed in addition to deduction under section 24(b).
b) Section 80EEA – Additional deduction amounting to Rs 1,50,000 is allowed in addition to deduction under section 24(b).
Only the individual is allowed to claim the deduction under this section provided he does not own any other house property.
Section 54 and 54F of the Income Tax Act, provide for exemption for long term capital gains if a house is purchased or constructed within specified period. In case the capital gains arise from a residential house held for more than three years, you are required to invest only the capital gains computed after taking into account the indexation benefits. In case the long term capital gains arise on sale of any asset other than a residential house property, you are required to invest the net sale consideration for purchase of a residential house property provided you do not own more than one residential house on the date of sale of such other asset.
From the above discussion it becomes amply clear that the government wants you to own a house and continue to own it and therefore it has provided many benefits under the income tax laws. There are other benefits under the banking and indirect tax area which also point towards government’s eagerness to ensure that every citizen has a roof over its head. This I intend to cover in my next article.
(The author is a CA, CS and CFPCM. Views are personal., He can be reached at email@example.com and @jainbalwant)
Disclaimer: The contents of this article are for information purposes only and does not constitute advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer to relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up. The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that Author / TaxGuru is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof. This is not any kind of advertisement or solicitation of work by a professional.
(Republished with Amendments by Team Taxguru)