Tax Benefits on Home Loan for Buyers

Budget 2023 Updates

The 2023-2024 Union Budget extended support for affordable housing by prolonging tax benefits for homebuyers and developers. Key highlights include:

• Extension of deductions for interest on affordable housing loans till March 2024.
• Tax holidays for affordable housing projects are continuing until March 2024.
• Proposing tax exemptions for Affordable Rental Housing Projects, targeting migrant workers' accommodation needs.
• Allocation of Rs.48,000 crore to the Pradhan Mantri Awas Yojana, emphasizing the government's commitment to affordable housing initiatives.

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Tax benefits on Home Loans for FY 2023-24 (AY 2024-25)

Tax benefits are one of the important considerations when planning to take a housing loan. Tax benefits on housing loans are provided under section 24, section 80C, and section 80EE of the Income Tax Act, 1961.

For a better understanding of these benefits, let us divide the discussion into two parts based on the components of EMI.

• Payment of the Principal amount
• Payment of Interest amount

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Income Tax Deduction for Home Loan Repayment of Principal Amount u/s 80C:

You can avail of a 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 Rs. 1,50,000. So, if you have paid more than Rs.1,50,000 as the principal component, you cannot get any tax benefit for the remaining amount.

Conditions for claiming home loan deduction under 80C are:

• Deduction for principal repayment can be claimed only after the construction of the property. For instance, The construction completion certificate was issued by the competent authority in March 2023, and then the principal amount repaid during the financial year 2022-23 can be claimed entirely in the income tax return of that year to the extent of Rs. 1,50,000. However, the principal repaid, if any, prior to the FY 2022-23 cannot be claimed in the return filed for the FY 2022-23.
• The deduction shall be allowed only for the repayment of a loan borrowed for the purposes of purchase or construction of house property. Hence, principal repayment of a loan borrowed for the purposes of alteration, renovation, or repair doesn't qualify for claiming deduction under section 80C.
• Loans should be taken from the financial institutions only as defined by the Income Tax Act 1961. Normally, Repayment of loans borrowed from individuals doesn't qualify for deduction under 80C. However, the interest paid on a sum borrowed from individuals shall be allowed as a deduction under section 24 of the Act (discussed below).
• The deduction is allowed only when the principal amount is paid. Thus, if your EMI for March’23 is paid in April’23. You cannot claim the principal amount paid in March’23 in the income tax return filed for FY 2022-23. March month EMI can be claimed in next year's return.
• After claiming the deduction, the property should not be sold before the end of 5 years of possession. Otherwise, the aggregate amount of deduction taken to date shall be added back to the income of the year of sale of the house.

Amount of Deduction for Payment of Home Loan Interest u/s 24

Houses are not built in a day; it is a long process involving the purchase of land, landscaping, construction of basic structures, furnishings, 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 a home loan for both the pre-construction and post-construction periods can be claimed by you! Deduction for the interest paid on a home loan can be claimed under Section 24 of The Income Tax Act 1961.

The interest is divided into two categories - Pre-construction/Acquisition & and Construction/Acquisition

Planning to apply for a home loan? Know the tax deductions or exemptions on the principal amount and interest paid for the loan with our Tax Advisory Service. Book a consultation today!

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A. Pre-Construction Period Interest:

It starts from the date of borrowing and ends on the 31st of March, just before the date of completion or the date of repayment of the loan, whichever happens first.

Interest in the pre-construction period is calculated using a simple formula:

= Home Loan taken for the purchase or construction of house *Rate of Interest* Pre-acquisition period/pre-construction period It is allowed in five equal installments from the year in which the construction is completed.

Condition for claiming the Pre-Construction/Acquisition Interest:

Income tax Interest Deduction on the pre-construction period is allowed only in case of a loan taken for the purchase or construction of your house.: No tax deduction is allowed for interest paid before completion if a housing loan is taken for the purpose of repair/renewal/reconstruction.

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B. Post-Construction Period Interest:

Interest on a loan after completion of construction is called the post-construction interest.

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Who can claim tax benefits on a home loan?

• To claim the tax benefit on a home loan, you must fulfill one basic requirement common to all the income tax sections.
• You must be the bearer of both the titles, i.e., owner of the house property and the borrower of the loan for the property. Only ownership alone or being a borrower of funds alone cannot reap these benefits. However, 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 a Hindu undivided family can claim tax benefits on a home loan. No company, partnership firm, or body corporation is allowed to get the benefit of home loan interest & principal deduction.

Case Study on How much Tax is Saved on Home Loan

If you take a home loan of Rs.50,000 @15 percent per annum for the construction of your home on 1st June 2015 and construction of the house is complete on 1st Jan 2021. Then, the total interest tax exemption Pre-Construction Interest + Post-Construction Interest

Calculation of Pre-Construction Interest:

The pre-construction period will be from 1st June 2015 till 31st March 2020(31st March just before the date of completion).

Interest for the 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 annum

Calculation of Post-Construction Interest:

The post-construction period will be from 1st April 2020 till the time of repayment of the home loan (even when the property is completed on 1st Jan 2021, the interest of the entire financial year will be treated as the post-construction interest)

The amount of interest per year post construction will be = 50,000*15%*1= Rs.7,500

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What is the limit/amount of income tax deduction in a year for the interest on a home loan?

The Income Tax Department specifies certain limits. These limits vary according to the nature of use(own use or let-out) for which house would be used for which the loan is being borrowed.

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Self-Occupied House Amount of Tax Deduction on Interest:

When you take a home loan for your 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:-:

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Rented-Out House(Including deemed let-out property) Amount of Tax Deduction on Interest:

If you buy a house for rent, it has a different tax limit for the interest deduction. Moreover, when you own more than one house, then one property of your choice is considered self-occupied, and others are deemed to be rented out(let out) by the Income tax department.

Tax Benefit:

In both cases, the entire interest on the home loan is allowed as a 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.

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Conditions for claiming the tax benefit on interest on a home loan under section 24 are:

• The deduction of interest u/s 24 is available on a due basis, unlike the deduction for repayment of principal, which is available on an actual payment basis. Thus, even when you have not paid any EMIs during the year, you can still claim tax benefits for interest deductions.
• You need to have an interest certificate specifying the amount of Interest on Loans.
• Interest paid for the prior period shall not be available for deduction in case of repair, renewal, or Reconstruction.
• The above limits are applicable only if construction is complete within 5 years

In addition to the interest tax deduction benefit under section 24, the income tax department provides additional interest deductions under section 80EE, especially for first-time home buyers.

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Income tax deduction for first-time home buyers in India under section 80EE:-

An individual is given an extra deduction amounting to Rs.50,000/- for interest paid on the home loan. The benefit of this deduction is given over and above the interest deduction taken under section 24.

Conditions for availing the tax benefit under section 80EE of the Income Tax Act 1961 are:

• At the time of taking a loan, you must be buying your first house.
• The amount of the loan shall not exceed Rs.35 lakhs
• The value of the property shall not exceed Rs.50 lakhs
• The loan must be taken from a Financial Institution and housing finance company
• Loan must be sanctioned between 01.04.2016 to 31.03.2017

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Tax Deductions on Second Home Loan

As of Assessment Year 2020-21, tax deduction on home loan interest is allowed for two self-occupied residential properties. However, the total deduction remains capped at Rs. 30,000 or Rs. 2 lakh, depending on the specific case. If not, the deduction is limited to Rs. 30,000.

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Income Tax Benefits on Home Loans

In Addition, to the tax deduction on the principal and interest component, you can further reduce the cost of your house by saving tax.

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Smart tax saving tips to maximize your tax benefit on the purchase of your home-

Stamp duty and registration charges:

You can take advantage of the stamp duty and registration charges paid at the time of purchase of the home under section 80C up to Rs.1,50,000. Unlike tax deductions of principal repayment of home loans, which can be claimed only after the house is complete, these expenses can be claimed anytime in the year of payment, irrespective of the fact whether any loan has been acquired or deducted.

Processing fee and service charges:

Processing fees levied on any loan taken are part of service charges, and any kind of charges taken by a bank to render its services are tax deductible and form part of the loan amount. Generally, processing fees are charged by the bank for borrowing a loan. Processing fees or any charges a bank takes to render its services are tax deductible. This can also be claimed as an interest expense under section 24 of the Income Tax Act. However, no amount for the amount paid to anyone (mostly your CA’s) for arranging the loan as commission or brokerage is not allowed as a deduction.

Being Joint holders of loan:

This can be good tax planning in case your spouse, being an applicant of a loan, is an earning member. In the case of earning members applying for loans in joint names, both can individually leverage benefits upto Rs.2 lakh u/s 24 and 1.5 lakh u/s 80C; also, they get an enhanced loan limit based on aggregate earnings. The income saved is almost the income earned. So, increase your savings to increase your income.

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How to claim Income Tax Benefits on Home Loans?

To claim the tax benefits on your housing loan, all you need to do is just follow a simple process:

• Calculate the amount of income tax deduction.
• Submit your home loan interest certificate and EMI statement to your employer at the time of income tax proof submission with your Form 12BB.

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 self-employed, you are not required to submit these documents to anyone. In both situations, it is advised to keep a record of the proof of the deduction claimed for future reference in case the IT department raises any questions.

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