Let’s understand the amount of money that you can save...
Tax benefits are one of the important consideration when planning to take a housing loan.Tax benefits on housing loan are provided under section 24, section 80C and section 80EE of Income Tax Act, 1961.
For a better understanding of these benefits, let us divide the discussion into two parts on the basis of components of EMI.
Before we understand these in detail, let first understand if you are eligible for claiming these tax benefits.
For claiming the tax benefit on home loan you must be fulfill one basic requirement common with all the income tax sections.
You must be the bearer of both the titles, i.e., owner of house property and the borrower of loan for the property. Only ownership alone or being a borrower of funds alone cannot reap you these benefits. Though, you may be a co-owner or a co-borrower.
So, if you are thinking of buying a home in your wife’s name and paying the EMI from your income, Then, unfortunately you will not get any tax benefit:(
Overall only an individual or member of hindu undivided family can claim tax benefits on home loan. No company, partnership firm or body corporates is allowed the benefit of home loan interest & principal deduction.
You can avail deduction under section 80C of the Income Tax Act for the principal amount repaid during the financial year.The maximum deduction allowed under this section is of Rs. 1,50,000. So, if you have paid more than Rs.1,50,000 as the principal component, you will not be able to get any tax benefit for the remaining amount.
Houses are not build in a day, it is a long process involving purchase of land, landscaping, construction of basic structure then furnishing,interiors etc. Hence, money is required & invested at every stage even before your house is ready to move in.
The good news is that the tax benefit of interest paid on home loan,for both the pre-construction and post construction period can be claimed by you! Deduction for the interest paid on home loan can be claimed under Section 24 of The Income Tax Act 1961.
The interest is divided in two categories - Pre-construction/Acquisition & Post Construction/Acquisition
If you take a home loan of Rs.50,000 @15 percent per annum for the construction of your home on 1st June 2011 and construction of house is complete on 1st Jan 2017.Then,the total interest tax exemption= Pre-Construction Interest + Post-Construction InterestCalculation of Pre-Construction Interest :
The pre-construction period will be from 1st June 2011 till 31st March 2016(31st March just before the date of completion).
Interest for pre-construction period will be = (50,000*15%*10/12)+(50,000*15%*4) = Rs.36,250
Amount of installment deductible in five equal installments = 36,250/5= Rs.7,250 per annumCalculation of Post-Construction Interest :
The post-construction period will be from 1st April 2016 till the time of repayment of the home loan (even, when the property is completed on 1st Jan 2017, interest of the entire financial year will be treated as the post construction interest)
Amount of interest per year post construction will be = 50,000*15%*1= Rs.7,500
|F.Y. 2016-17||F.Y. 2017-18||F.Y. 2018-19||F.Y. 2019-20||F.Y. 2021-22||F.Y. 2022-23|
Now, the next question that come to one’s mind is
There are certain limits specified by the Income Tax Department. These limits varies according to the nature of use(own use or let-out) for which house would be used for which the loan is being borrowed.
Self-Occupied House Amount of Tax Deduction on Interest : When you take a home loan for own residence then the total limit for tax deduction including the pre-construction period and post-construction period interest that can be claimed in a year are:
|Amount of Tax Deduction in a Year||When Can You Claim It?|
|Up to Rs. 2,00,000||
- Purpose of loan- The sum must be borrowed for purchase or construction of new house property.
- From FY 2016-17 onwards, the purchase or construction of property must be completed within 5 years from the end of the financial year in which the sum is borrowed. (Prior to this amendment, the time limit for completion was 3 years.)
Example: The loan is borrowed in Dec, 2016. Hence the construction must be completed by March, 2022.
|Up to Rs. 30,000||
- Purpose of loan- The sum is borrowed for repair, renovation or reconstruction.
If you buy a house for the purpose of renting it has a different tax limit for the interest deduction. Moreover, when you own more than one house ,than one property of your choice is considered as self-occupied and others as deemed to be rented out(let- out), by the Income tax department.Tax Benefit :
In both the cases, the entire interest on the home loan is allowed as deduction. The interest here includes the post-construction period interest for the year plus one-fifth of the pre-construction period claimed in the current year.
In Addition, to the interest tax deduction benefit under section 24, income tax department provides additional interest deduction under section 80EE specially for the first time home buyers.
An individual is given extra tax benefit amounting to Rs.50,000/- for interest paid on the home loan.The benefit of this deduction is given over and above interest deduction taken under section 24.
|Particulars||Quantum of Deduction (Rs.)|
|Self Occupied Property||Non-Self Occupied Property|
|Section 24||2,00,000||No Limit [set off limit is Rs. 2 Lakh]|
In Addition, to the tax deduction on the principal and interest component, you can further reduce the cost of your house by saving tax.
For claiming the tax benefits on your housing loan all you need to do is just follow simple process:
If you forget to submit these proofs to your employer, you can still claim the tax benefit at the time of filing your income tax return.If you are a self-employed, you are not required to submit these documents to anyone. In both the situations,it is advised to keep the record of the proof of the deduction claimed for future reference incase the IT department raises any question.
Conclusion: Income Tax benefits on housing loan are provided under section 24, section 80C and section 80EE of Income Tax Act, 1961.
The amount paid as Repayment of Principal Amount of Home Loan and Amount paid as Stamp Duty & Registration Fee is also allowed as tax deduction under Section 80C even if the you have not taken Loan.
Tax Benefit payment of home loan Interest along with Processing fees or any kind of charges taken by bank to render its services are tax deductible is allowed as a deduction under Section 24 of the Income Tax Act.
Incase, you have property jointly then each joint-owner can separately claim these deductions.
If you are living in a rented house and are taking Tax Benefit of HRA, even then you can claim Tax benefit on home loan under Section 24, Section 80EE & Section 80C.
For claiming the above tax deductions, you would be required to furnish the statement provided by the lender clearly indicating the amount payable and paid towards Interest and Principal.
After claiming the above deductions of Tax Benefit on Home Loan, your balance Income would be taxed as per the Income Tax Slab Rates.
|Principal amount repaid||Interest amount repaid||Interest deduction for first time buyers||Stamp Duty|
|Section applicable||Section 80C||Section 24||Section 80EE||Section 80C|
|Basis of Tax Deduction||Paid Basis||Accrual Basis||Accrual Basis||Paid Basis|
|Maximum deduction limit||1,50,000||2,00,000||50,000||1,50,000|
|Conditions||Property should not be sold until expiry of 5 years from purchase||Loan taken for either purchase or construction + property constructed within 5 years||Amount of loan <= 35 lakh + Value of property <= 50 lakh + Loan should be taken during 01.04.2016-31.03.2017||Stamp Duty should actually be paid|
Homeownership can be an expensive affair, but the tax benefits of owning a home can help you save thousands and lakhs of rupees of taxes also. So, go on increase your tax benefits by planning your taxes before buying your dream home:)
- Buying a house is one of the biggest tax planning opportunity in a person’s life, this requires careful analysis of one’s financial and family situations.
- Planning your taxes at the time of buying your first house has long-term impacts on your finances.
- Tax2win has expertise in personal taxation.Our experts would help you plan your taxes, to help you get the maximum tax benefits.