The aspiration to own a house is cherished by many individuals. To encourage citizens to invest in properties, the Government offers various tax benefits on home loan under the provisions of the Income Tax Act of 1961. Familiarizing yourself with these tax benefits can lead to substantial savings on your tax payments.
When you take out a home loan, it consists of two components:
The principal repayment and the interest payments. Tax deductions can be availed under both categories through Section 80C and Section 24(b) of the Income Tax Act, respectively.
Tax Deductions on Principal Repayment under Section 80C:
Under Section 80C, you can claim a tax deduction of up to Rs. 1.5 lakh per financial year on the principal repayment portion of your Equated Monthly Installments (EMIs). However, this deduction becomes applicable only after the construction of the residential property is complete. It’s essential to note that if you sell your property within five years from the end of the financial year in which you obtained possession, this benefit will be reversed.
Tax Deduction for Stamp Duty and Registration Charges under Section 80C:
You can also claim a tax deduction under Section 80C for stamp duty and registration fees, subject to the overall limit of Rs. 1.5 lakh applied to principal repayment. This benefit is available irrespective of whether you take a home loan or not. Additionally, this deduction can only be claimed in the year in which you incur these expenses.
Tax Deduction on Interest Paid on Home Loan under Section 24(b):
Section 24(b) allows you to avail a deduction on the interest paid on your home loan. For a self-occupied house, you can claim a maximum tax deduction of Rs. 2 lakh annually from your gross income. However, this is applicable only if the construction or acquisition of the house is completed within five years. It’s important to note that the loan must be borrowed solely for acquisition or construction purposes and not for repair, renewal, or reconstruction. If the construction or acquisition period exceeds the stipulated timeframe, you can claim deductions on the interest of the home loan for purchase, construction, repair, renewal, or reconstruction up to Rs. 30,000 annually.
Conversely, if you have rented out your property, the entire interest paid on your home loan for purchase, construction, repair, renewal, or reconstruction can be claimed as a tax deduction, without any time limit for the completion of construction. However, it’s worth noting that in a given year, the set-off of loss under the head ‘income from house property’ against any other head of income is limited to Rs. 2 lakh, and any unabsorbed loss can be carried forward for set-off in subsequent years, in accordance with the provisions of the Income Tax Act.
Tax Deduction on Interest Paid for Under Construction Property:
If you purchase an under-construction property and make EMI payments, you can claim a deduction on the interest paid on your housing loan after the construction is completed. The Income Tax Act allows you to claim a deduction for both the pre-construction period interest and the post-construction period interest.
The interest pertaining to the pre-construction period is allowed as a deduction in five equal annual installments, starting from the year in which you acquire or construct the house property. Therefore, the total deduction available under Section 24(b) to a taxpayer for interest is 1/5th of the interest pertaining to the pre-construction period (if applicable) plus the interest pertaining to the post-construction period (if applicable).
Tax Deduction for Joint Home Loan:
In the case of a joint home loan, each borrower can claim deductions on the home loan interest up to Rs. 2 lakh under Section 24(b), and tax deduction on the principal repayment up to Rs. 1.5 lakh under Section 80C. This effectively doubles the amount of deductions available compared to a home loan taken by a single applicant. It is important to note that both applicants must be co-owners of the property and both should contribute to the EMIs.
Tax Benefits on Second Home Loan:
If you take a second home loan to purchase another property, you can still enjoy the aforementioned tax benefits. However, the aggregate amount of deductions is subject to the respective caps mentioned earlier. As per the Union Budget of 2019, the Government has introduced further incentives for investing in a house property.
Previously, only one property could be treated as self-occupied, while the second property was deemed to be let out, resulting in the calculation of notional rent and taxation of the same as income. However, now even a second property can be considered as a self-occupied property. Although a home loan comes with a financial cost, utilizing it wisely can significantly reduce your financial burden and help you maximize your tax savings.
Frequently Asked Questions:
Does a Home Loan Top-Up offer tax benefits?
A top-up home loan is eligible for tax benefits under Section 80C if it is utilized for the purchase or construction of a residential property, and under Section 24(b) if it is utilized for the acquisition, construction, repair, renewal, or reconstruction of the residential property, depending on the deduction claimed.
Does home loan protection insurance provide tax benefits?
You can claim a tax deduction under Section 80C on the premium paid for a home loan protection insurance plan. However, the deduction is not allowed if you borrow the premium money from your lender and repay it via EMIs.
Who is eligible to claim tax deductions on housing loans?
Tax deductions can be claimed by the owner of the property. If a home loan is taken jointly (such as by spouses), each borrower can claim a deduction on the home loan interest in proportion to their ownership, provided both are servicing the loan.
If I construct a house and sell it after a few years, can I claim tax deduction?
If you sell the house within five years from the end of the financial year in which you obtained possession, the tax deduction claimed with respect to the repayment of the principal amount of the loan under Section 80C will be reversed. However, the deduction for interest payment remains unchanged, and there is no provision for the reversal of interest deduction claimed under Section 24(b).
What is the maximum tax benefit on a home loan?
The maximum tax deductions for a housing loan under different sections of the Income Tax Act are as follows:
Up to Rs. 2 lakh under Section 24(b) for a self-occupied home.
Up to Rs. 1.5 lakh under Section 80C.
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