Tax benefits available for home loans

In order to make owning a house affordable government provides certain tax benefits on home loans. Let us discuss.

Deduction in respect of interest on home loans

Section 24(b) of the Income Tax Act, allows you a deduction for interest on money borrowed to buy, construct, repair or reconstruction of any of your property whether residential or commercial. For the purpose of this deduction even the processing fee paid for processing your home loans as well as any pre-payment charges paid to the bank or housing finance companies are also treated as interest and you can claim these fee paid as interest. For being eligible for deduction in respect of interest, you can borrow from anyone, including your friends and relatives, as long as you are able to prove that the money borrowed is used for specified purposes.

The amount of deduction available for interest is dependent on whether the property is let out or is self occupied. In case the same is used for own residence or is reserved for own occupation, you can claim a deduction upto Rs. 2 lakhs every year in respect of such self occupied property. However if the property in question is let one you can claim full interest paid on money so borrowed against the rental income of the property.

If you own and occupy more than one house, you have to select any one of the house as self-occupied and the other house/s is deemed to have been let out. In respect of the property which is deemed to have been let out, you need to offer market rent for taxation. Since such property even though is self occupied but is treated as let out, you can claim full interest in respect of money borrowed for such property.

Thought you can claim full interest on home loan in respect of let out property or deemed to have been let out property there is a limit of loss under the head “income from house property” which you can set off against other incomes, which is Rs. 2 lakhs in a year. The loss under the head “Income from House Property” which can not be set off against other income  during the year can be carried forward for set off against income from House property in next eight years.

In respect of an under-construction property, the payment of EMIs generally starts after construction is completed except in cases of inordinate delay in completion of construction.  For an under construction property the tax benefit in respect of interest cannot be claimed till construction is complete and possession is obtained. This benefit can be claimed for the whole year in which the possession is taken so even if possession is taken on 31^st March of the year, you can claim the benefit for the interest in respect of the whole year.

For the period during such property remains under construction, you still have to pay the interest on disbursements made during that period till construction is completed and possession handed over.  This interest is called Pre EMI interest.  You can claim aggregate of the Pre EMI interest  paid during the construction period in five equal instalments beginning from the year in which construction completed.

This deduction is available within the overall limit of Rs 2 lakh for self-occupied house property. However if you sell the under construction property before completing five years after taking possession, the claim for the remaining years is lost. However in case the property is sold before taking the possession, the interest paid on such loan can be capitalised and claimed as cost while computing capital gains as and when you sell the property.

In addition to the home loan benefit for interest under Section 24(b), Section 80EE also allows you deduction for interest on home loan taken, for small house upto fifty lakhs, from financial institutions like banks and housing finance companies. This benefit is available if the home loan is sanctioned between 1^st April 2016 and 31^st March 2017, provided the amount of home loan does not exceed thirty five lakhs. This tax benefit on interest on home loan under Section 80EE is restricted to fifty thousands rupees every year provided you did not own any house on the day the home loan is sanctioned. This deduction can be claimed even for interest paid during the construction period as the condition of completion of house property is not prescribed here.

Deductions for repayment of principal

Under Section 80C, an individual and an HUF can claim a deduction up to Rs 1.50 lakh for principal repayment of home loan taken for a residential house along with other eligible items like  Public Provident Fund, Employee Provident Fund, life insurance premium, National Saving Certificates Equity Linked Saving Scheme etc. This deduction can only be claimed in respect of home loan taken from specified entities like banks and housing finance companies, etc. This deduction can also be claimed from the year in which the construction of the house is completed and possession taken. You need to continue to own this house, on which home loan is taken, for minimum period of five years from the end of the year in which the home loan was taken. If you transfer this property within five years the deduction claimed in earlier years is reversed and treated as income of the year in which the house is sold.

Balwant Jain is a tax and investment expert and can be reached on [email protected], @jainbalwant on twitter.