Tax Benefits of Home Loans: Analysis of Sections 24B, 80C, 80EE and 80EEA

The Income Tax Act of 1961 provides taxpayers with various tax benefits to encourage investments in property through home loans. It is important to understand the provisions related to tax deductions on home loans. This article aims to analyze the implications of Sections 24B, 80C, 80EE, and 80EEA, which offer deductions for both the interest on the loan borrowed and the principal repayment. By exploring these sections, individuals can optimize their tax benefits and make well-informed financial decisions.

The Income Tax Act of 1961 aims to promote property investment by offering tax incentives for home loans. Repaying a home loan involves two components: the principal amount and the interest paid on the borrowed sum. The tax implications vary based on whether the property is self-occupied or let out. For self-occupied properties, Section 23 states that the annual value will be nil. This article analyzes the provisions of Section 24B, Section 80C, Section 80EE, and Section 80EEA to provide a deeper understanding of the tax deductions available for interest and principal repayment on home loans.

Deduction for interest on loan borrowed

Homebuyers can claim a deduction on the interest paid on their home loan under section 24(b) of the Income Tax Act, 1961. A housing loan can be taken either for acquiring, constructing, repairing, renewing, or reconstructing a house property. The interest payable on such a loan will be divided into two phases: the pre-construction period and the period that begins after the construction is completed or the property is acquired. Interest payable on a fresh loan taken to repay the original loan raised earlier for the aforementioned purposes is also eligible for deduction.

1. Pre-construction period interest: – Pre-construction period refers to the timeframe that begins from the date on which the loan is sanctioned and ends in the year immediately preceding the year in which the property was acquired or construction was completed. The interest payable during this period can be claimed as a deduction over a period of five years, in equal annual installments starting from the year of acquisition or completion of construction.

2. Interest for the year in which construction is completed/property is acquired and subsequent year: –

Self-occupied property: In the case of a self-occupied residential property, a deduction of ₹2 lakhs is allowed against the interest incurred on the housing loan taken for acquisition or construction. The total deduction limit of ₹2 lakhs applies to both pre-and post-construction period interest for self-occupied properties. Homebuyers are eligible to claim this deduction if the construction or acquisition of such properties is completed within 5 years from the end of the financial year in which the loan was borrowed.

However, the deduction amount is reduced to ₹30,000 if the loan is taken for reconstruction, repairs, or renewals of the self-occupied residential property.

In the case of a joint housing loan where all co-borrowers are also co-owners of the property, each co-borrower can claim a deduction of ₹2.00 lakhs on the interest paid.

Illustration– Mr. Sarthak co-owns a residential house property in Patna along with his brother Mr. Reyansh, where his brother’s family resides. Both of them have equal share in the property and the same is used by them for self-occupation. Interest is payable in respect of a joint loan of ₹ 50,00,000@10% taken on 1.4.2020 for the acquisition of such property. Compute the deduction which would be available to Mr. Sarthak and Mr. Reyansh under section 24(b) for A.Y.2022-23.

Solution

Computation of deduction u/s 24(b) available to Mr. Sarthak for A.Y.2022-23
Particulars	₹
Interest on loan taken for acquisition of residential house property at Patna ₹ 50,00,000 x 10% = ₹ 5,00,000 Ms. Sarthak’s share = 50% of ₹5,00,000 = ₹ 2,50,000
Deduction under section 24(b) restricted to	2,00,000

–

Computation of deduction u/s 24(b) available to Mr. Reyansh for A.Y.2022-23
Particulars	₹
Interest on loan taken for acquisition of residential house property at Patna ₹ 50,00,000 x 10% = ₹ 5,00,000 Ms. Sarthak’s share = 50% of ₹5,00,000 = ₹ 2,50,000
Deduction under section 24(b) restricted to	2,00,000

Let out/deemed to be let out property: – Interest payable for the year of completion of construction or acquisition of the property can be fully claimed as a deduction in that specific year. On the other hand, interest payable for subsequent years can be claimed as deductions in their respective years. The ceiling limit of interest deduction does not apply in respect of let out or deemed to let out property.

Principal repayment of housing loan including stamp duty, registration fee, and other expenses

Section 80C provides for the deduction of the repayment made towards the principal component of a housing loan borrowed for the purchase or construction of a new residential house property. The maximum amount of deduction that can be claimed is ₹ 1.5 lakhs per year.

This deduction is allowed subject to the condition that the annual value of the property is chargeable to tax under the head ‘Income from House Property’ or would have been chargeable to tax under the same head had it not been used for the assessee’s own residence.

In the case of a joint home loan where all co-borrowers are also co-owners of the property, each co-borrower can claim a deduction on the repayment of the principal amount of the home loan under Section 80C, up to ₹1.50 lakh each.

However, if the property is sold within five years from the end of the financial year in which possession of such property is taken, the deduction claimed on the principal repayment under Section 80C shall be taxable as income in the year of sale.

The approved types of payments, which qualifies for deductions, are as follows:

1. Repayment of the principal amount borrowed by the assessee from

(a) Any bank including a co-operative bank;

(b) The Central Government or any State Government;

(c) The Life Insurance Corporation;

(d) The National Housing Bank;

(e) Any public company formed and registered in India with the main object of carrying on the business of providing long-term finance for the construction or purchase of houses in India for residential purposes which is eligible for deduction under section 36(1)(viii);

(f) Any company in which the public are substantially interested or any cooperative society engaged in the business of financing the construction of houses;

(g) The assessee’s employer, where such employer is an authority or a board or a corporation or any other body established or constituted under a Central or State Act;

(h) The assessee’s employer where such employer is a public company or public sector company or a university established by law or a college affiliated to such university or a local authority or a co-operative society.

2. Any installment or part payment of the amount due under any self-financing or other schemes of any development authority, Housing Board, or other authority engaged in the construction and sale of house property on an ownership basis; or

3. Any installment or part payment of the amount due to any company or a co-operative society of which the assessee is a shareholder or member towards the cost of the house allotted to him; or

4. Stamp duty, registration fee, and other expenses for the purposes of transfer of such house property to the assessee.

Inadmissible payments: However, the following amounts do not qualify for a rebate:

1. admission fee, cost of share, and initial deposit which a shareholder of a company or a member of a co-operative society has to pay for becoming a shareholder or member; or

2. the cost of any addition or alteration or renovation or repair of the house property after the issue of the completion certificate in respect of the house property or after the house has been occupied by the assessee or any person on his behalf or after it has been let out; or

any expenditure in respect of which deduction is allowable under section 24.

Deduction for interest on loan borrowed for acquisition of house property by an individual

An additional deduction under Section 80EE of ₹50,000, over and above the deduction under Section 24(b), will be allowed against the interest payable on a housing loan borrowed for the purpose of acquiring a house property, subject to the following conditions:

(i) The loan has been sanctioned by a Financial institution during the financial year 2016-17,

(ii) The amount of loan sanctioned is less than ₹35 Lakhs,

(iii) The value of the residential property does not exceed ₹ 50 Lakhs, and

(iv) The assessee should not own any residential house on the date of sanction of loan.

Where any deduction is claimed under this section, no deduction shall be allowed of such interest under any other provision.

Deduction in respect of interest payable on loan taken for acquisition of residential house property

Section 80EEA allows an additional deduction up to ₹1.50 lakhs, over and above the deduction under Section 24(b), for interest payable on a home loan taken subject to the following conditions:

(a) The assessee must be an individual.

(b) Loan should be sanctioned by a Financial Institution during the period from 1st April, 2019 and31st March, 2022

(c) The stamp duty value of the residential property does not exceed ₹ 45 Lakhs.

(d) The Assessee should not own any residential house on the date of sanction of loan

(e) The individual should not be eligible to claim deduction u/s 80EE.

Conclusion: Taking advantage of the tax benefits available for home loans can significantly impact an individual’s financial planning. Sections 24B, 80C, 80EE, and 80EEA of the Income Tax Act offer deductions for interest paid on loans and principal repayment. Understanding the eligibility criteria and conditions for each section is essential for maximizing tax benefits. By analyzing these provisions, individuals can make informed decisions while availing of home loans and optimize their tax liabilities.