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2018

Housing Loan and Income Tax Benefits

Housing Loan Income Tax benefits

To own a house is dream of one and all. However, the stark inflation in real estate market has proven to be a nightmare for young couples in India who aspire to own a house. Thanks to Income Tax Act which has given Home Loan borrowers a reason to cheer. There are two sections under Income Tax Act i.e. Section 80C and section 24 under which a Home Loan borrower can claim deductions in relation to Home Loan.

Key Highlights:

Tax Benefit on Repayment of Home Loan for a self occupied House Property
Tax Benefit on Repayment of Home Loan in case of Jointly Owned Property
Eligibility for HRA Exemption Benefits
Treatment of Pre-Construction Interest

Tax Benefit on Repayment of Home Loan for a self occupied House Property:

From Income Tax point of view, you must bifurcate total amount of EMIs paid by you during the relevant previous year in two components:

1. Home Loan Principal Repayment: Principal repayment can be claimed as deduction under section 80C up to maximum limit of Rs. 1,50,000. Hence, claimable deduction is either Rs. 1,50,000 or actual amount of principal repaid during the year whichever is lower. This is subject to the maximum limit across all 80C investments.
2. Home Loan Interest Payment: Interest paid during the year can be claimed as a deduction under Section 24B. The maximum amount of interest that can be claimed as deduction is Rs. 2,00,000 or the actual interest paid whichever is lower. (You can claim this interest only when you are in possession of the house).

Refer to below table to understand maximum deduction limit on home loan repayment.

Particulars Deduction U/S Maximum Deduction
Principal Payment 80C 1,50,000.00
Interest Payment 24b 2,00,000.00
Total Maximum Deduction on House Loan Repayment 3,50,000.00

Consider below scenarios for further clarification:

Particulars Case 1 Case 2 Case 3
Principal Repayment 1,50,000 1,00,000 3,00,000
Interest Repayment 2,00,000 1,50,000 2,50,000
Maximum Deduction U/S 80C 1,50,000 1,00,000 1,50,000
Maximum Deduction U/S 24B 2,00,000 1,50,000 2,00,000
Total Deduction 3,50,000 2,50,000 3,50,000

 

Note:
In case if house property is given on rent, there is no upper cap for claiming deduction U/S 24B.
However, if loss from house property needs to be set off against any other head, the maximum loss that can be set off must not exceed Rs. 2,00,000.

 

In case of Jointly Owned Property:

If house property is jointly owned all co-owners can claim deduction under both sections subject to following conditions:

1. You must be a co-owner in the property: To be able to claim tax benefits for a home loan, you must be an owner in the property. Many a times, a loan is taken jointly, but the borrower is not an owner as per the property documents. In such a case you may not be able to claim tax benefits.

2. You must be a co-borrower for the loan: Besides being an owner, you must also be an applicant as per the loan documents. Owners who are not borrowers and do not contribute to the EMI shall be devoid of the tax benefits.

3. The construction of the property must be complete: Tax benefits on a house property can only be claimed starting the financial year in which construction of the property is complete. Tax benefits are not available for an under construction property. However, any expenses prior to completion are claimed in five equal instalments starting the year in which construction is complete.

Tax Benefit on Repayment of Home Loan in case of Jointly Owned Property:

Tax Benefit in case of Self-Occupied Property:

1. For a self occupied property: Each co-owner, who is also a co-applicant in the loan, can claim a maximum deduction Rs 2,00,000 for interest on the home loan in their Income Tax Return. The total interest paid on the loan is allocated to the owners in the ratio of their ownership.

2. Each owner/borrower can claim interest benefit up to a maximum of Rs 2,00,000. Goes without saying, the total interest claimed by the owners/borrowers cannot exceed the total interest paid for the loan. For example Mr. X and his father bought a house on loan and paid Rs 5,60,000 in interest. They have a 50:50 share in the property. Mr. X can claim Rs 2,00,000 in his tax return, his father can also claim Rs 2,00,000.

3. For Rented Property: In the budget 2017, the interest that can be claimed as a deduction in case of rented property is restricted to the amount to which loss from such house property does not exceed Rs 2 lakhs.

Each co-owner can claim a deduction of maximum Rs 1,50,000 towards repayment of principal under section 80C. This is within the overall limit of Rs 1,50,000 of Section 80C.

Eligibility for HRA Exemption Benefits:

If the house for which you have taken a home loan is not ready for possession, and you leave in rented house, you can claim HRA exemption. Once, construction is complete, no exemption can be claimed for HRA. However, if you let out your house for rent and yourself leave in another rented house, you can continue to avail HRA exemption.

Pre-Construction Interest:

Pre-Construction Interest is the amount of interest paid by borrower before construction of the house is complete. No benefit in respect of such interest can be availed during construction period. However, such interest can be claimed as deduction in five equal instalments starting from the year in which construction is completed. Please note that such deduction shall be subject to maximum deduction limit under relevant sections.

Key Highlights:

  1. Home loan borrowers are entitled to tax benefits under Section 80C and Section 24 of the Income Tax Act. These can be claimed by the property’s owner.
  2. In the case of co-owners, all are entitled to tax benefits provided they are co-borrowers for the home loan too. The limit applies to each co-owner.
  3. A co-owner, who is not a co-borrower, is not entitled to tax benefits. Similarly, a co-borrower, who is not a co-owner, cannot claim benefits.
  4. Housing companies usually require all co-owners to be joint borrowers to a home loan. Loan providers specify who can be a joint borrower for a home loan.
  5. The tax benefit is shared by each joint owner in proportion to his share in the home loan. It’s important to establish the share for each co-borrower to claim tax benefits.
  6. The certificate issued by the housing loan company, showing the split between principal and interest for the EMIs paid, is required for claiming tax benefits.
  7. You will need to show the statement provided by the lender showing the repayment for the year as well as the interest & principal components of the same.

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