Tax benefits you can avail by investing in an apartment

Most of us are aware of the tax deductions available for home loan principal and interest payments. However, tax laws for fully-constructed, under-construction, self-occupied and let-out apartments all differ from each other. Knowing the nitty-gritty of these tax laws can help you claim all the deductions you stand eligible for. Here’s a closer look:

Home loan principal repayment

According to Section 24 and Section 80C, individuals availing home loans can claim tax exemptions on principal as well as interest payments.

Home loan principal payments enjoy tax deduction up to INR1.5 lakhs under Section 80C of the Income Tax Act. However, this deduction is only available if the apartment’s construction is complete, not before that.

Registration fees and stamp duty qualify for deduction under Section 80C. However, these tax benefits can be availed only in the year that the payment is made. Processing fees for the sanctioned loan, service fees or prepayment charges are eligible for deduction under Section 24 of the Income Tax Act.

If an individual sells the house within five years of taking possession or completion of construction, the deductions claimed on the principal payments are reversed and summed up. This deducted amount of the previous years is treated as the individual’s income in the year of property sale and is taxed accordingly.

Set off of Losses under the Head House Property

Till FY 2016-17, loss under the head house property could be set off against other heads of income without any limit. However, form FY 2017-18, such set off of losses has been restricted to Rs 2 lakhs.

Interest payment

Self-occupied apartment

Constructed: If you take a home loan to purchase an apartment and you live there, the paid interest qualifies for tax deduction up to INR 2 lakhs under Section 24. Again, this deduction is for fully constructed apartments.

Under construction: For apartments under construction, the tax deduction becomes available only after the construction is complete. The apartment’s construction should be complete within five years (3 years up to A.Y 2016-17) from the end of the financial year in which the home loan is taken.

During the construction phase, all interest paid keeps accumulating, and is factored in five equal installments starting from the year when the property was constructed. Five years after possession, this can be used to claim the necessary tax deduction. So if the total interest paid during the construction phase amounts to INR 5 lakh, you may claim INR 1 lakh deduction every year for the next five years. Simply put, interest paid on home loans in the pre-construction phase can be availed for deduction in five equal installments.

If the apartment’s construction is not completed or the possession not taken within five years (3 years up to A.Y 2016-17) from the end of financial year in which the home loan was taken, the tax benefit towards the interest payment under Section 24 whittles down to INR 30,000 per financial year.

Not self-occupied apartment

For an apartment that is not self-occupied, the total interest paid can be claimed for tax deduction. However, while filing your tax returns, you need to show the rent earned as income from house property. To compute the exact taxable amount, deduct municipal taxes from the rental income, then deduct 30% towards repair and maintenance charges from this value. For instance, your income from property is INR 1.5 lakhs, INR 30,000 is deducted for municipal taxes, and 30% is further deducted towards repair and maintenance. The taxable component amounts to INR 84,000. (1,50,000-30,000-30%)

If you have a second apartment and it is unoccupied, it is still considered letout. A notional rent income is computed based on market rates, which becomes taxable after making the 30% deduction towards maintenance and repair.

Unoccupied apartment due to employment in another city

If you do not live in your owned apartment because you are employed in another city, the deduction limit on the interest paid will remain INR two lakhs per annum. However, you can claim deductions on the house rent allowance (HRA) component in your salary up to INR 60,000 per annum under Section 80 GG. This was INR 24,000 earlier and has been increased after the announcement of the 2016-17 Union Budget.

Credit Protection insurance

If you take credit protection insurance, the insurer pays your outstanding home loan in case of your demise. Credit protection insurance is a single-premium scheme, wherein the premium qualifies for deduction under Section 80C.

Tax implications for under-construction properties

Taking a home loan for an under construction flat is beneficial, but a fixed time frame is imposed. If you are availing of a home loan here, you may defer the deduction of the interest paid during the pre-construction phase.

Loan disbursement is different for under-construction apartments, and deductions can be claimed based on it. Also, apartments under construction are cheaper than ready-to-move apartments.

Tax benefits on multiple home loans

Tax benefits can be availed even in case of multiple loans. However, the total benefit towards repayment of principal remains limited to INR 1.5 lakhs and does not change as per the number of loans.

The tax benefit on interest payments towards a self-occupied property remains capped at INR two lakhs. For let-out property/properties, there are no restrictions and the full interest paid can be deducted from income from house property under Section 23.

You are free to choose any property as self-occupied and the other(s) will be automatically considered as the let-out property(ies).

What does not qualify?

All the above-mentioned tax benefits are only for loans taken for purchase or construction of a house. Loans taken towards repair, renewal or reconstruction, do not carry any tax benefit on the principal repayment. Tax benefits on interest payments (under Section 24) for such loans are limited to INR 30,000 per financial year.

(Republished with amendments)