TAX BENEFITS FROM HOME LOAN

There are certain tax benefits on payment of EMIs on home loan.

EMI on home loan consists of 2 components namely, PRINCIPAL and INTEREST.

Assessee can avail tax benefits in the following ways.

SECTION 24(b)- Assessee can claim INTEREST component of EMI under Section 24(b). The maximum deduction allowed under Section 24(b) will be

Type of house property	Maximum deduction allowed
Self-Occupied	Rs. 2,00,000
Let-Out	No limit (with restrictions on set-off)

WHAT IS A SELF-OCCUPIED PROPERTY?

A house property which is used for own residential purpose is considered as SELF-OCCUPIED property. The property may be occupied by self / spouse / children / parents to be eligible for claiming as self-occupied property. From Financial Year 2019-20, an assessee can claim maximum 2 houses as self occupied property for the purpose of taxation. Even a vacant house shall be treated as self occupied property. If an assessee owns more than 2 house properties, only 2 of them can be claimed as self-occupied. An assessee can claim maximum Rs.200,000 as interest deduction under section 24(b) for EACH house property.

WHAT IS A LET-OUT PROPERTY?

A house property which is leased out on rent during the financial year is considered as LET-OUT property. If assessee owns more than 2 properties, such houses over and above 2 shall be deemed as LET-OUT property however, the assessee may not be earning rent on the same. There is no limit on interest deduction allowed for such property. However, the maximum loss from house property that can be set-off is Rs.200,000. The balance loss if any can be carried forward for next 8 Assessment years.

TAX DEDUCTION ON PRINCIPAL REPAYMENT OF HOME LOAN:

Principal repayment of home loan by the owner of house property can be claimed as deduction under Section 80C. 

CONDITIONS FOR CLAIMING THE DEDUCTION:

• Loan should have been taken for the construction/purchase of new house.
• Loan should have been availed from financial institution.
• Construction of house property is COMPLETED.
• Maximum deduction allowed is Rs.1,50,000 within the overall limit of Section 80C.
• The house property should not be transferred till 5 years from the date of possession, otherwise tax benefits shall be reversed and taxed as income in the year of Transfer.

TAX DEDUCTION ON HOME LOAN INTEREST:

Interest payment on home loan can be allowed as deduction under Section 24(b). 

CONDITIONS FOR CLAIMING THE INTEREST:

• Interest can be claimed on ACCRUAL basis.
• Interest can be claimed by OWNER of house property only.
• Interest can be claimed for a CONSTRUCTED house only.
• Interest CAN be claimed from the year of OCCUPANCY only. Hence, deduction on home loan interest CANNOT be claimed during the construction of house.
• Loan should have been availed from financial institutions (or) relatives (or) friends.
• Interest INCLUDES service charges, processing charges, brokerage, commission, prepayment charges etc.
• Interest on Unpaid Interest CANNOT be claimed as deduction.
• LOAN shall have been availed in HIS/HER name.
• In case the assessee pays interest for delayed installments to the seller of house property, such additional payment to the seller being interest charges in nature can be claimed as deduction.
• Interest payment certificate shall be provided for claiming the deduction.

NOTE: Tax benefit need NOT be reversed in spite of transferring the property within 5 years from the end of financial year of POSSESSION of house.

PRE-CONSTRUCTION PERIOD REPAYMENT OF LOAN:

INTEREST component of the home loan repaid during the period of construction is alone eligible for deduction under Income Tax Act,1961. Interest paid on home loan before taking the possession of house is referred as PRE-CONSTRUCTION PERIOD INTEREST. The interest paid during the period of construction is accumulated and claimed as deduction in 5 equal installments under Section 24(b) from the year of actual possession.

In case the construction of house is not completed within 3 years from the date of availing the loan, then deduction of Pre-construction period interest is restricted to Rs.30,000 per Financial year. The period of 3 years will be computed from the end of financial year in which the loan was availed.

Pre-construction period interest can be claimed as deduction in addition to the interest component of home loan paid during the year under Section 24(b).

ADDITIONAL INTEREST DEDUCTION UNDER SECTION 80EE: 

In case of first time house buyers where value of house is less than Rs.50,00,000 and amount of Loan is less than Rs.35,00,000, interest deduction of Rs.50,000 can be claimed under Section 80EE in addition to the interest deduction under Section 24(b). This deduction can be claimed by Resident AND NON-Residents INDIVIDUALS.

IN CASE OF JOINT OWNERS and CO-BORROWERS:

Each owner can claim the deduction of interest and principal as per the limits mentioned under section 24(b) and section 80C. The deductions can be claimed by the co-owners in the same ratio as that of share of ownership.

NOTE: To claim the tax deductions, an assessee MUST be a CO-OWNER in the property AND CO-BORROWER for the loan.

Assessees can get a higher tax benefits from holding the property jointly.

-Composed by

CA. Konda Mounika FCA,BBM,DISA