How to save tax on a home loan

By Guest |  11-09-18 | 

Owning a house is a dream come true for many. And more often than not, it is achieved by availing of a home loan. Archit Gupta, Founder and CEO of ClearTax writes about the tax benefits available.

Section 80C - Principal portion of home loan repayment

The principal component of the equated monthly instalment, or EMI, that you pay month-on-month on a home loan can be claimed under Section 80C. It has a ceiling limit of Rs 1.5 lakhs for every given financial year (i.e. the period in which the home loan continues to be repaid).

However, there is a condition attached to claiming this deduction. Law mandates that the property purchased out of such home loan must be held for a period of 5 years before being sold off. If the property is disposed prior to the completion of this period, then whatever deduction has been claimed by a taxpayer under Section 80C will be added back to the income of the taxpayer in year of sale.

Section 24 - Interest paid on home loan

The second component of any loan is the interest paid on the loan. As a taxpayer, deduction can be claimed on the interest paid on a home loan. However, the limits are different for a self-occupied home i.e. one which the taxpayer occupies himself or his family resides in it and a house given on rent.

For a Self-occupied house: In case of a self-occupied house, a maximum of Rs 2 lakhs of interest paid during the year, can be claimed as a deduction in one financial year.

For a house on lease: When a taxpayer purchases a house and gives it out on rent, then the entire interest payable on the loan can be claimed as a deduction. However, the maximum loss one can claim under house property would be restricted to Rs 2 lakhs.

Interestingly, the benefit under this section applies not only to home loans taken from financial institutions but also from friends, relatives and employers.

Pre-Construction Interest

It is pertinent to note here that the benefits discussed under Section 24 are applicable when you invest in a fully constructed property. However, if you invest in a property which is still under construction (which is referred to the pre-construction period), interest paid during this period can be claimed as a deduction in 5 equal instalments starting from the year in which the construction of the property is completed. Here again, the overall loss from house property, irrespective of what a taxpayer claims as interest and pre-construction interest, would be restricted to Rs 2 lakhs only. The loss that remains unadjusted during the year can be carried forward to future years for set off.

Stamp duty and registration charges

Apart from giving relief in the principal repayment of the loan under Section 80C, this section also permits the claiming of stamp duty and registration charges as a deduction. However, since it is claimed as a benefit under Section 80C, the limit is capped at Rs 1.5 lakhs. This can be claimed in the year in which such expenses have been borne by the taxpayer.

First-time home owners

A first-time home owner is eligible to claim an additional deduction of interest paid for a home loan up to an amount of Rs. 50,000 over and above the deduction he claims under Section 24.

To be eligible to claim this deduction, the taxpayer must bear in mind that the value of the house must not exceed Rs 50 lakhs and the loan amount must not be greater than Rs 35 lakhs and he should have availed the loan from a financial institution between April 1, 2016 and March 31, 2017.  The taxpayer will be eligible to claim such deduction effective FY 2016-17.

Applicability of tax benefits for co-owners/ joint owners

The tax benefits which an individual homeowner can claim will also be applicable to the co-owners of the property where each of the owners will be individually eligible to claim each of the benefits discussed above.

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