Home Loan Taxation Rules: Things That Tax payers Should Know

  • In an era when houses have moved out of the affordability arena, home loan is an important expense in building the dream house for many tax payers. With prices shooting through the roof, the loan requirement too has gone up.
  • The good news is that the taxation benefit offered on home loan as expanded too. An individual can claim up to Rs. 1.5 lakh of principal repayment under the Section 80C, while the interest portion too can be claimed to the extent of Rs 2. lakh. This amount claimed between co-borrowers can prove to be a bigger tax saving for the family as a whole.
  • But one is always confused on what portion can be claimed under which section. Here is an easy guide for you to understand the little know tax implications and benefits of the home loan.

Other Home Loan Charges

  • Have you been worried about the additional charges that banks levy on processing home loans or closing them? Don’t fret as the can help you claim tax benefits. Processing fee and pre-payment penalty paid to close a home loan can be claimed for tax deduction under home loan interest deduction under Section 24 (b).

Claim Unlimited Interest

  • Many who have two home loans are under the impression that the original limits of interest deduction of Rs. 2 lakh can be claimed for both the loans. But the truth is that the limit holds true only for self-occupied property. However, there is no ceiling for let out property. One can claim a deduction on the entire amount paid as interest.

Loan from Relatives

  • You can claim the interest deduction even if you have taken a home loan from a relative or friend. However, the Section 80C benefit of up to Rs.1.5 lakh available for principal repayment won’t be available if the loan hasn’t been taken from a financial institution.
  • Interest payment to friends and relatives can be claimed under Section 24 but only against a certificate received from them. In the absence of the certificate, you would not be eligible for the deduction. The recipient of interest income who issues the certificate is liable to pay tax on the interest income that he receives.

Co-ownership and Tax Deduction

  • Co-borrowers are always in a dilemma on the portion each can claim and when. So, the ground-rule is that the person who is a co-owner can claim tax benefits only if he is repaying the housing loan and is a co-borrower. So, if a husband and wife are co-borrowers for a property owned by another family member then no tax benefits can be claimed as they don’t own the property.
  • Similarly, for homes jointly owned between husband and wife who are also loan co-borrowers income tax deduction can be claimed by both. The limits would be individually applicable. So, the principal repayment can be claimed as a deduction under Section 80C up to a maximum amount of Rs 1.50 lakh (Rs. 1 Lakh up to A.Y. 2014-15) individually by each co-owner.
  • In cases where the house is owned by more than one person and is also self-occupied by each co-owner, each co-owner shall be entitled to the deduction individually on account of interest on borrowed money up to a maximum amount of Rs. 2 lakh (Rs 1.50 lakh up to A.Y. 2014-15).
  • If the house is given on rent, there is no restriction on this amount. Both co-owners can claim deductions in the ratio of ownership.
  • What if your ownership proportion differs? Even then the repayment of the principal amount of loan claimed as a deduction would be a maximum amount of Rs. 1.50 lakh individually by each co-owner. But, the interest portion for self-occupied house can be claimed in the ratio of ownership up to a maximum of Rs 2. lakh individually. If the house is given on rent, there is no restriction on this amount and both co-owners can claim deduction in the ratio of ownership.

Claim Non-home Loans

  • The Income Tax Act does not distinguish on the type of loan – whether home or personal loan – used to meet the requirements of purchasing or refurbishing a property. Hence if you have taken a personal loan to fill the gap between the loan amount and down payment then this can be claimed as a deduction from house property under section 24.
  • The principal amount repaid on the personal loan cannot be claimed for deduction. Nonetheless, the interest amount paid annually for a personal loan taken to acquire, renew, repair or reconstruct a house property can be claimed for deduction.
  • For self-occupied properties interest amount up to Rs. 2 lakh can be claimed, while there is no such ceiling applicable if the taxpayer has purchased or renewed a second property, which is let out. One should note that the interest portion cannot be claimed as a tax deduction if the property purchased is at the construction stage.

Home Renovation Loans

  • If you take a loan for extension or renovation of your existing house, then you cannot claim the principal portion of the loan under Section 80C. However, you will be able to claim the interest amount under Section 24. A limit of Rs. 30,000 is applicable for self-occupied properties. But the entire interest can be claimed for an extension/renovation loan taken for houses which are rented or not self-occupied) without any limit.
  • Deduction is available on an accrual basis and not on a payment basis. Hence, deduction under Section 24 can be claimed on yearly basis even if no payment has been made during the year but interest has accrued or become payable.

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Financial Management