To make house buying more lucrative than it already is as an investment option, the government provides various tax benefits for home buying, especially when it is procured with the help of a home loan. These incentives are mainly provided in the form of deductions in income tax (I-T) liability.
Broadly, it has two components:
1. Principal amount repayment
2. Interest payment on home loan
Different sections of the Income Tax (I-T) Act, 1961, govern the components of repayment of home loans. While filing the I-T return, these are claimed as tax deductions.
Let’s understand these sections as well as the deductions.
Tax benefit under Section 80C
Section 80C of the I-T Act covers the repayment of the principal amount of the home loan. Under the Section, Rs. 1.5 lakh is the highest limit to claim deductions. Deductions under this Section are also claimed on investments in the Senior Citizens Saving Scheme, the Equity-Oriented Mutual Funds, the Public Provident Fund (PPF) Account, the National Savings Certificate, the Tax Saving Fixed Deposits, etc.
Do note that if the assessee has not taken a loan, the amount paid as registration fee and stamp duty is allowed as the tax deduction. Also:
*Irrespective of the year for which the payment is made, the tax deduction under Section 80C is available on actual payment basis.
*Only after the construction of the house is complete and the completion certificate is obtained, tax benefits can be claimed under this Section.
*For the years in which the property was under construction, there would be no deduction allowed for repayment of the principal amount.
*If the assessee transfers the property on which tax deductions were claimed within a period of five years, no tax benefit and deduction will be allowed under Section 80C(5) of the I-T Act.
*With respect to the previous years, the aggregate amount of tax deduction claimed in the previous years will be deemed to be the income of the assessee for the year in which the property has been sold and the assessee has to pay tax on such income.
Tax benefit under Section 24
Under Section 24 of the Act, tax benefit on home-loan payment of interest is possible as a deduction. According to the Section, interest paid on the home loan is deducted from the house property income where the loan is taken for reconstruction, repair, purchase or construction of a residential property.
The limit has been capped at Rs 2 lakh on a self-occupied home under Section 24 which was increased in Budget 2014-15 from Rs 1.5 lakh earlier.
However, there is no maximum limit prescribed for a home loan taken on a property which has not been self-occupied. In this case, the tax deduction of the whole interest amount can be availed of under the Section.
However, the tax is deductible on an accrual basis which means that annually, the taxpayer should claim the deduction even if no actual payment has taken place, unlike Section 80C that caters to a deduction on the basis of payment.
Also, if the construction of the house taken on a home loan is not completed within the stipulated period of five years from the end of the year in which the loan was taken, the interest benefit will drastically be cut to Rs 30,000 from Rs 2 lakh.
2017 Budget pointers
If the house is not self-occupied, income from house property is calculated by reducing the interest paid from rent payment. There may be a loss from house property if the interest paid is more than the rent paid. Income from any other head can be used to set-off the loss.
However, the upper limit has been capped at Rs 2 lakh under the Finance Act 2017 in the Budget 2017. The remaining amount would have to be carried forward to the next years.
Homebuyers may start paying EMI (equated monthly installment) to the bank even before the construction is complete. Section 24 states that before completion of construction, a tax deduction for payment of interest should not be sanctioned.
Before completion of the purpose for which the loan was taken whether for repair, reconstruction or renewal, no tax deduction may be availed for the interest paid.
If the loan is taken for purchase or construction of a property, the interest paid during the construction of a house can be claimed in five equal installments for five successive financial years, starting from the year the construction begins till the time when the possession of the house is given to the homebuyer.
For instance, in 2009, Ram purchased a house in New Delhi with the help of a home loan of Rs 10 lakh from a bank paying interest of 10 per cent per annum. The construction of the house was completed in April 2011. According to Section 24 of the I-T Act, tax deduction for interest payment can be availed of from the financial year 2011-12. However, for the next five successive financial years, Rs 2 lakh which is the interest paid on the home loan before completing the construction would be allowed as tax deducted at Rs 40,000 per annum starting from the financial year 2011-12.
Important points to remember
*Interest paid on the outstanding amount is not treated as the tax deduction.
*If the construction is completed within three years from the end of the financial year in which the loan is taken then only the tax deduction will be available to the taxpayer.
*There is no tax deduction to be claimed for a commission paid for the arrangement of the home loan.
*Loss under income from house property might be set off against income from other heads in the same year if the taxpayer is paying interest on the home loan and municipal taxes and is not earning any income from the house property.
*The loss can be carried forward to the next eight years if there is an outstanding balance even after the loss is set-off against income from various heads in the same financial year.
*The claim for tax benefits on interest on home loans can be made only by the person who has constructed or acquired the property with the loan/s. It is not available to the successor of the taxpayer.
Tax benefit under Section 80EE for first-time buyers
In the Budget 2016, Section 80EE, which allows for an additional deduction of Rs 50,000 on interest on home loan, was re-introduced as an interest over and above Rs 1.5 lakh available under Section 80C and Rs 2 lakh deduction available under Section 24 of the I-T Act.
Instances for application of Section 80EE:
*If the loan taken is less than Rs 35 lakh and the value of the property is less than Rs 50 lakh, the deduction under Section 80EE is available.
*The time period of the sanctioned loan should be between April 1, 2016, and March 31, 2017.
*Till the time the repayment of the loan carries on, this deduction will be allowed to be taken.
*The deduction is allowed from the financial year 2016-17 onwards.
It is important to note that deductions are available per person which means that if the house has been purchased through a joint home loan, each person repaying the amount of the loan would be eligible for the deduction of Rs 50,000. Also, if a person is living in a rented accommodation and is privy to an HRA (house rent allowance), then also, a tax benefit on home loan was taken can be availed of under Section 24, Section 80C and Section 80EE of the I-T Act.
Statements mentioning the principal and interest amounts paid and payable should be clearly furnished to claim these tax deductions. The balance income of the taxpayer is taxed according to the prevailing slabs of after the tax deductions are claimed on the home loan