Home loan – Income tax benefit

Introduction

For everyone, especially in India, owning a home is a dream come true. Owning a home is considered to be a supreme achievement for the common Indian man. The Indian government has consistently demonstrated a strong propensity to encourage people to invest in homes and has launched schemes and programs with an aim to shine a bright light on the Indian housing market by improving accessibility and affordability to housing.

If one rents, lives on, or owns the land, he may easily apply for a home loan. A home loan is a sum of money borrowed from a bank or other financial institution to purchase real estate. Banks give loans secured by property these days, but one must mortgage the property to qualify for a fair loan amount based on the property’s current worth. A loan against property is a secured loan that lenders authorize based on the promise that, should one fail to repay the loan in full, they would retain control of his property.

While a house purchase helps a person get nearer to his financial objectives, it also allows him to save a significant amount of tax. There are several tax advantages that come with home loans when one purchases a property, and they can reduce dramatically and lower one’s tax liability. The Income Tax (IT) Act of 1961 extends tax benefits on home loans to the sum one pays back each month for one’s first property through Equated Monthly Instalments (EMIs). Principal and interest are the two halves of EMIs or equivalent monthly instalments. The IT Act’s provision of a home loan tax advantage covers deductions for both the annual principal and interest payments.

What is meant by a home loan?

The concept explained

A home loan is a secured loan that is acquired from a bank or financial organization for the purpose of buying a property by pledging the asset as security. Home loans provide high-value financing with reasonable interest rates and lengthy terms. The borrower receives the title to the property back after repayment through EMIs. If the borrower is unable to pay back the loan, the lender has the legal authority to enforce his charge on such property.

Types of home loans

1. Home purchase loan: This is the loan used to buy a house.

2. Home extension loan: Obtaining a loan to extend one’s home allows, say, to add a floor, room, garage, bathroom, kitchen, etc.

3. Home loan balance transfers: These loans let one move lenders, benefit from better terms and conditions, and pay less interest.

4. Home improvement loan: This is the loan that is used to renovate or repair homes.

5. Home expansion loan: obtained to construct an additional floor, room, bathroom, or kitchen

6. Home construction loan: A loan obtained to construct a new home.

7. Land acquisition loan: Obtained to purchase a piece of land for constructing one’s own home.

8. Land purchase loan: Obtained to acquire a piece of land on which to build one’s own home.

9. Top-up loan: This enables one to borrow money at cheap rates over the amount of the current loan for any reason.

10. Joint loan: A loan taken out by two or more persons, such as couples.

How to apply for a home loan?

People must provide their necessary personal, employment, income, and property information to complete the house loan application process. When everything is prepared, upload the required documentation for a house loan online and follow the verification process to have it authorized. The loan amount is accepted if all the required information is provided, and a sanctioned letter will be given out immediately. Candidates who are paid and those who are not going through distinct application processes for house loans. As a result, the following instructions provide a step-by-step guide for getting a home loan for both parties:

For salaried individuals

• Enter key financial, personal, and employment information in their relevant sections.
• Use a home loan eligibility calculator to know the loan amount that a person is eligible for.
• Use the home loan EMI calculator to plan one’s loan effectively and opt for a suitable amount.
• Furnish property-related documentation to the relevant financial institution from which the person wishes to obtain a loan.
• Upload the required documentation to initiate verification protocols.

For self-employed individuals

• Launch the online application of the relevant financial institution from which the person wishes to obtain a loan.
• Provide all necessary information, such as the business’s age, the required loan amount, and its yearly income.
• Click the ‘submit’ button.
• Access and confirm the loan offer. Several financial institutes pre-approve loans in cases of eligible individuals.

Eligibility criteria to avail home loan tax benefit

The property’s owner may receive a tax deduction. Each borrower may deduct home loan interest in proportion to their ownership if a home loan is obtained jointly (by a spouse, for example) as long as both borrowers are repaying the loan.

Statutory provisions providing a home loan tax benefit

Section 24(b) of the Income Tax Act 1961

For salaried people alone, this particular tax benefit is available. Tax benefits under Section 24(b) are available for salaried people alone. If the borrowed money is used to purchase another residential property, a tax credit of up to Rs. 2,00,000 may be claimed. But in accordance with Section 24(b), a linkage between the borrowed sum and the planned purpose is required.

The returned principal is not eligible for a tax deduction. Only the interest paid is. The deduction cannot be made, though, if the funds are used to upgrade the property that is subject to a mortgage. If the loaned funds were used for a wedding, a child’s education, or travel costs, no tax credit could be claimed.

One may deduct up to Rs 2,00,000 in income tax from the interest payments on one’s home loan under Section 24(b) of the Income Tax Act. Examine the prerequisites for obtaining tax advantages under this section:

1. This Rs 2,00,000 cap only applies to properties that are used for personal use.

2. There is no upper limit for claiming interest if the property is rented out (or not self-occupied).

3. Within five years of receiving the loan, one must either acquire the property or finish the work.

Section 37(1) of the Income Tax Act 1961

Contrary to popular belief, income is not covered by Section 37(1) of the Income Tax Act. Only the costs are. Therefore, if one has business-related expenses that are not strictly capital or personal expenses, one can include this amount in his income/loss statement.

Please be advised that under no circumstances is a loan secured by real property tax deductible. The loan may be tax-free when a person takes one out because he is investing in real estate in return for it, regardless of whether it was used for business or personal purposes. A loan against property, however, implies that the person borrowed money by giving up his property. Therefore, this amount is not tax deductible.

Section 80C of the Income Tax Act 1961

Section 80C is the most popularly used section. However, a loan secured by the property is not subject to Section 80C. One might deduct the percentage of the total that represents interest under Section 24(b) even if the actual payment was not received. In accordance with Section 24, the deduction is applied to interest that is “paid or payable.” To preserve the records for use as evidence, nevertheless, is necessary. One may only make adjustments to the housing tax, claim the deduction, etc., if the loan amount is used to pay for another property repair.

Home loan borrowers may claim an income tax deduction of up to Rs 1,50,000 on the principal amount paid back throughout the year under Section 80C of the Income Tax Act. For obtaining tax advantages under this provision, there are several requirements:

1. Before claiming a deduction under the above-mentioned section, the house’s construction must be finished.

2. The property cannot be transferred or sold within five years of possession.

3. If the property is sold within five years, all prior deductions will be included as income in the year of the sale.

Section 80EE of the Income Tax Act 1961

Section 80EE allows first-time homebuyers to receive a tax deduction and permits an extra tax deduction on home loan interest payments of up to Rs 50,000. In other words, this deduction goes above the Section 24(b) exemption of Rs. 2,00,000. The following are the prerequisites for getting Section 80EE tax benefits:

1. The borrower must be  purchasing his first home.

2. The borrowing period should have been between April 1, 2016, and March 31, 2017.

3. The house’s worth should not exceed Rs. 50,00,000, and the home loan shouldn’t exceed Rs. 35,00,000.

Section 80EEA of the Income Tax Act 1961

“Housing for All” received a significant boost from the 2019 Union Budget, which Finance Minister Nirmala Sitharaman unveiled by providing an extra tax credit of Rs. 1,50,000 on interest payments made on housing loans from April 1 2019, to March 31 2020. This deduction’s main objective is to assist homeowners in securing affordable finance in order to help the Indian government fulfil its commitment.

Section 80EEA allows first-time homebuyers to deduct an extra Rs 1,50,000 for interest payments on the loan amount. This is in addition to the Section 24(b) limit of Rs 2,00,000 for tax exemptions.

The following criteria must be met in order to claim the deduction under this section:

1. The property’s worth should not exceed Rs. 45,00,000.

2. The borrower should not be the owner of any additional residential property.

3. The home loan must have been taken out between April 1 2019, and March 31 2021.

4. No tax advantages may be claimed under Section 80EE.

5. Only interest payments on the mortgage may be deducted.

Deductions are allowed concerning the home loan.

On interest payment

A number of provisions in the Income Tax Act of 1961, which intended to help people buy their own houses, allow homebuyers to deduct some loan-related costs from their taxes, including interest. A person can claim a tax advantage on the following two components when they obtain a home loan to either buy or build a property and are making EMI payments:

• Interest payment
• Principal repayment

In accordance with Section 24, one may deduct interest on one’s EMI payments made during the current fiscal year up to Rs 2,00,000 from one’s total income. The maximum tax deduction for interest paid on self-occupied residential property is Rs 2,000,00, beginning with the assessment year 2018–19. There is no cap on the interest that can be recouped on rental property. However, the maximum loss that may be recovered under the heading “House Property” is only worth Rs 2,000,000. This loss can be claimed at the beginning of the year in which the building was completed.

On principal repayment

The loan amount that has been approved and disbursed, whether all at once or in instalments, is referred to as the principle of a mortgage. A person is eligible to deduct up to Rs 15,000,00 per year from his taxable income for the percentage of his home loan EMI that goes toward principal repayment under the provisions of Section 80C of the Income Tax Act of 1961.

This deduction is restricted since one is not allowed to sell the home within five years of purchasing it. If he sells the house within five years of buying it, the amount of the tax credits he claimed for the principal amount repayment will be deducted from his income for the year.

If he decides to sell his property within five years of purchasing it, the value of the tax benefits claimed for the principal amount repayment will be applied to his income in the year of the sale and will be subject to tax.

On interest paid for a home loan during the pre-construction period

Suppose a person has purchased a property that is still being built and has not yet moved in but still pays the EMIs. In that case, he won’t be able to deduct home loan interest until the construction is finished or from the moment he purchased a property that is already built. This does not mean that he would not be entitled to any tax benefits on the interest paid between the time he took out the loan and the completion of the building.

Homes that are still under construction but will be finished several years after the purchase are frequently purchased. In this situation, the commencement of the house loan repayment period occurs before the borrower actually owns the property. The Indian government enables him to deduct taxes from the EMI payments, also known as “pre-construction interest,” from his income in these circumstances. A person is qualified to claim a tax exemption on the interest paid in five equal yearly instalments once the construction of the property for which one has a home loan is complete. The maximum drop remains the same at Rs. 2,000,000.

One must pay Rs 10,000 in interest each month on a home loan for construction. The current phase of the construction project will end in 2020. In order to claim the pre-construction interest, which is approximately Rs 24,00,000, five equal yearly instalments must begin in 2020. The highest interest deduction permitted by Section 24(b) is Rs 2,00,000 (including current-year interest and pre-construction interest). In the case of a first-time buyer, the person is eligible to deduct an extra Rs 15,00,000 under Section 80EEA.

Calculation

For instance, a person’s construction is finished in the 2022–23 fiscal year. Up till March 31, 2022, one has paid a total of INR 6,00,000 in interest. In the fiscal years 2021–22, 2023–24, 2024–25, 2025–26, and 26–27, a deduction of INR 1,20,000 may be made. There is no mechanism to deduct more than INR 2,00,000 worth of interest per year, and the pre-EMI deduction is included in the overall Section 24 cap.

Another crucial thing to keep in mind is that the total deduction one may claim will be limited to Rs. 30,000 if the property construction is not finished within five years of receiving the loan (for all five years). After his home loan begins, the five-year deduction computation begins on the first day of the next fiscal year. Therefore, if he took out a loan in October 2020, his five-year term would start the next fiscal year (on April 1, 2021) and would finish on March 31, 2025.

On stamp duty and registration charges

When purchasing a home, the buyer is required to pay a stamp duty to the sub-registrar in the country where the property is situated. One may deduct this amount from his taxes if his overall deductions under Section 80C do not go above the maximum threshold of 1,50,000. It’s critical to remember that he can only deduct this expense in the year that it occurs.

On top-up loans

Existing home loan customers may also be eligible for ‘top-up loans’, which have lower interest rates than personal loans. Any justification that satisfies the requirements of the lending financial institution may be used for the top-up loan. One can be eligible for tax benefits if he can demonstrate with all the required receipts and paperwork that the top-up loan he received was used for the acquisition, building, repair, or renovation of a residential property.

In contrast to the Rs 2,00,000 deduction provided for interest payments, the highest deduction allowed is Rs 30,000. This deduction, however, is only valid if the property is self-occupied. There is no cap on the amount of the deduction that may be claimed in the event that the property was rented out whilst repairs and renovations were being made. However, if the interest amount exceeds Rs 2,00,000 in the given financial year, the person may carry the excess money forward by up to 8 years. The maximum set-off that one may claim in any financial year is still Rs 2,00,000 against other categories of income.

The tax benefits on loans secured by a property—even top-up loans—are often predicated on the principal repayment in relation to the utilization of the funds. If the funds were used for real estate development or the purchase of a new property, the claimed tax deduction would fall straight under sections 100 and 24(b), respectively. However, if the funds were used for fixes, upgrades, or alterations to real estate, one cannot claim a deduction on the principal amount.

On a joint home loan

If a person applies for a loan alongside another person, his chances of having his request approved are higher. Any bank or financial institution is more likely to approve a house loan application with several borrowers since they are aware that a number of borrowers will repay the loan. These co-applicants are also referred to as co-borrowers.

In addition to increasing the borrowers’ chances of getting a house loan approval, joint ownership gives them more repayment options and reduces the risk that they would have to pay the EMI on their own. Additionally, co-borrowers and co-applicants who have joint home loans are eligible for joint home loan tax exemptions, so they can each claim income tax benefits separately.

According to Sections 24(b) and 80C, each co-applicant may deduct up to Rs 2,00,000 in taxes for interest payments and Rs 1,50,000 in taxes for principal repayment. However, the applicants must share home ownership and be able to afford the EMIs.

Tax benefits of owning a second house

A person might be qualified for the tax advantages mentioned above if he takes out a second loan to buy another piece of property. However, the comparable ceilings indicated above apply to the overall deduction amount. The government has introduced further incentives for purchasing real estate as part of the 2019 Union Budget. Prior to this change, only one property could be thought of as being self-occupied, and any additional property was believed to be rented out, leading to the calculation and taxation of notional rent as income. However, it is now possible to classify a second property as self-occupied real estate. Even while a home loan involves costs, using his loan intelligently can help one minimize those costs and increase one’s tax savings.

How to claim home loan tax benefits?

It is straightforward and quick to obtain tax advantages for a home loan.

1. Verify that the required name is on the residential property.

2. Make sure the person in question is a co-owner of the home if there is a joint loan.

3. Determine the total amount of tax deductions the person is eligible to claim.

4. Give the person’s employer the home loan interest certificate so they can modify the TDS.

5. File one’s Income Tax returns if the person doesn’t comply with this requirement.

6. Borrowers who are self-employed are exempt from submitting these papers.

Limitations on claiming home loan tax benefits

There is no provision for tax exemption if the loan amount is utilized for medical expenses, travel, or education. There are various provisions under Section 80C that permit one to claim tax advantages. One may be qualified for tax benefits even if he has an active loan. However, loans secured by property are not qualified for such benefits under Section 80C of the Income Tax Act.

Monetary limits on home loan deductions simplified

Nature of deductions	Section applicable	Maximum Deduction	Conditions imposed
Interest	Section 24(b)	Rs. 2,00,000	The loan must be used to buy or build a house, and the building project must be finished within five years of the end of the fiscal year in which the loan was obtained.
Principal	Section 80C	Rs.1,50,000	Selling real estate should not be done within five years of purchase.
Stamp Duty	Section 80C	Rs.1,50,000	It can only be deducted in the year when these costs are incurred.
Interest	Section 80EE	Rs.50,000	The property’s worth cannot exceed Rs 50,00,000, and the loan amount borrowed must be Rs 35,00,000 or less.
Interest	Section 80EEA	Rs.1,50,000	The property’s stamp value must be at most Rs. 45,00,000. The taxpayer is not qualified to submit a Section 80EE deduction claim.

Conclusion

People frequently take out home loans to buy a house, an apartment, or a plot of land on which to build a house or to renovate, add on to, and fix up an existing piece of real estate. The property is mortgaged to the lender as security for the loan. Until the loan and any associated interest have been paid off, the bank or financial institution will retain custody of the title or deed to the property. Interest rates for home loans can be fixed, floating, or partially fixed and partially floating, depending on the borrower’s requirements. There are also several tax advantages that apply to one’s loan, and it is essential to understand the relevant provisions and the nitty-gritty of home loan tax benefits to save up on income tax legally.

Common queries demystified

Availability of income tax deductions for house top-up loans

Income tax deductions for house loans are available, but only in particular circumstances. If housing top-up loans are used to build, renovate, or repair a residential property, they may be deducted from income for tax purposes. One must submit accurate expenditure reports. The maximum deductions allowed under these loans are INR 30,000. However, this will go against the 2,00,000 rupee total deduction allowed by Section 24. For instance, if a person wants to remodel one’s house and the housing top-up loan’s interest is INR 40,000, one may only deduct INR 30,000 from the remodelling costs. The most that one may deduct from his home loan’s interest under Section 24 in this situation is INR 17,00,000.

Eligibility of a person and their spouse taking advantage of the home loan tax benefit if they have a joint home loan

If two spouses have a combined home loan, both of them can claim home loan tax advantages as long as they are co-owners of the property. The deductions are based on the amounts that each of them has contributed to the combined home loan repayment, respectively. This includes a maximum of INR 2,00,000 per year for home loan interest paid under Section 24 of the Income Tax Act and INR 1,50,000 per year for home loan principal repayment under Section 80C.

Eligibility for an 80C home loan tax benefit if already claiming deductions on other investments

The Income Tax Act’s Section 80C offers a wide range of investments and plans through which one may claim tax deductions. However, the provision states that one can only deduct up to INR 1,50,000 altogether. Thus, one might not be able to deduct the whole INR 1,50,000 for his home loan if one is already claiming deductions on other investments under Section 80C.

Usage of Section 24(b) and Section 80EEA simultaneously to claim tax benefits

If a person fulfils the requirements, one may claim benefits under both Section 24(b) and Section 80EEA. However, before one makes an exemption claim under Section 80EEA, one must first use up the amount under Section 24(b). Also, keep in mind that only loans obtained between April 1, 2019, and March 31 2021, are eligible for tax exemption under Section 80EEA.

Eligibility to claim a tax benefit on building and subsequently selling a house

According to Section 80C, the tax deduction for repayment of the loan’s principal will be reversed if one sells the house within five years of the end of the fiscal year in which he first took possession of the property. There is no analogous mechanism for the reversal of the interest deduction claimed under Section 24(b). Therefore the deduction for the interest payment will stay intact.

Availability of tax advantages for a property that is still being built

One may claim tax advantages for a home that is still being built. Once a person has ownership of the property, he may deduct the interest he paid on the loan. Starting with the year that the construction is finished, he may claim this interest over the course of five instalments.

Eligibility of the second house for a home loan tax benefit

One can deduct up to INR 2,00,000 from the total interest paid on both of his home loans if he chooses to use one of them to buy a second property. In addition to the regular deductions for rental income, he may also deduct this amount from his rental income if he rents out a second house. The second property will be regarded as self-occupied if it is not rented out. One is permitted to claim two residential properties as self-occupied under the income tax legislation. The deduction for interest payments is limited to INR 2,00,000 annually for each residence he owns and inhabits if he owns two homes.

Provisions for deductions on home loan interest available for first-time home purchasers

Sections 24 and 80C of the Income Tax Act allow for deductions for first-time homebuyers. The annual deduction for home loan interest under Section 24 is limited to INR 2,00,000, whereas the annual deduction for home loan principal repayment is limited to INR 1,50,000.

References

• https://legislative.gov.in/sites/default/files/A1961-43.pdf
• https://incometaxindia.gov.in/Pages/acts/income-tax-act.aspx
• https://www.fullertonindia.com/knowledge-center/tax-benefits-on-loan-against-property.aspx
• https://cleartax.in/s/home-loan-tax-benefit
• https://timesofindia.indiatimes.com/business/faqs/home-loan-faqs/what-is-a-house-loan/articleshow/60479745.cms