Almost everyone wants to own a house. An own house not only gives you that sense of pride but also provides financial security to the family. However, with real estate prices at elevated levels, it is not easy to purchase a house outright. Most people rely on home loans to own that dream house. And they have huge EMIs to take care off too. A big EMI can put huge burden on your monthly cash flows. Fortunately, the Government, in order to incentivize purchase of houses, offers certain tax benefits on repayment of home loans. These tax benefits reduce your EMI burden to some extent. In this post, I shall focus on such tax benefits associated with repayment of a housing loan.
Tax Benefits on Home Loan Repayment
On Principal Repayment up to Rs 1.5 lacs per financial year
You can avail deduction up to Rs 1.5 lacs per financial year towards principal repayment on housing loan under Section 80C of the Income Tax Act. Do note that this cap is for the entire 80C investment basket.
On Interest payment up to Rs 2 lacs per financial year (Self-Occupied)
You can avail up to Rs 2 lacs per financial year towards interest payment on home loan under Section 24 of the Income Tax Act. The actual deduction allowed will be lower of actual interest paid and Rs 2 lacs. This is for a self-occupied house.
Suppose you have taken a home loan of Rs 50 lacs at 10% p.a. for 20 years. EMI is Rs 48,251. In the first year of repayment (assuming it is aligned with the financial year), you will pay total interest of Rs 4.96 lacs and repay Rs 82,737 of principal amount. You will be able to avail tax deduction of Rs 2 lacs for interest payment and Rs 82,737 for principal repayment in the first year.
Are other expenses relating to house purchase eligible for similar tax benefits?
Stamp duty and registration charges are eligible for deduction under Section 80C. Tax benefit for payment of such charges can be availed only in the year you make the payment.
Apart from this, any processing fee for the sanctioned loan, service fee or any prepayment charges is eligible for deduction under Section 24 of the Income Tax Act.
Any there conditions for availing these tax benefits on home loans?
Yes, there are certain conditions to be met before you start availing income tax benefits.
- You can avail these tax benefits only after taking possession of the house (or after the construction of the house is complete). So, there are no tax benefits before you get the possession (or for an under-construction property.)
- If the construction of house is not completed or the house is not acquired within
3 years5 years from the end of financial year in which the loan was taken, the tax benefit for interest payment under Section 24 shall come down to Rs 30,000 (and not Rs 2 lacs) per financial year. For instance, if you took the home loan in July 2018, you should get the possession of the house before March 31, 2024 in order to avail maximum tax benefit for interest payment.
- Additionally, these tax benefits are only for the loans taken for construction or purchase of a house. For any loan taken for repair, renewal and reconstruction, there is no tax benefit on principal repayment. The tax benefits on interest payment under Section 24 for such loan shall be limited to Rs 30,000 per financial year.
What about the principal repaid or the interest paid before taking possession?
As mentioned before, you do not get any tax benefit for an under-construction property. So, what about the repayment done before you get the possession (or before the construction is complete).
The interest payment made before the financial year (in which the house was acquired or construction completed) can be aggregated and claimed as deduction under Section 24 in five equal installments over the next five years (starting from the financial year in which the possession is taken).
Please note this relaxation of tax benefit on interest payment is only for loan taken for purchase or construction of house. If the loan is meant for repair, renewal or reconstruction, there is no such tax benefit.
On the other hand, there is no recourse for principal repayment made before the year of possession. There won’t be any tax benefit for such principal repaid.
Suppose you took a home loan (Rs 20 lacs, 10%, 20 years) in July 2012 and get the possession only in January 2015. EMI for the loan is Rs 19,300. From July 2012 till March 31, 2014, you would have paid 21 EMI installments. In these 21 installments, you would have paid Rs 3.45 lacs of interest and Rs 60,170 of principal amount. The interest amount of Rs 3.45 can be divided into five equal parts (Rs 69,028) and claimed as deduction five successive years starting FY2015 (FY2015 to FY2019). There is no such recourse for principal repayment. Since the house got completed in FY2015, you will get regular deduction for interest payment and principal repayment from FY2015 onwards. In FY2015 (till FY2019), you will get deduction for interest paid in FY2015 (respective year) plus Rs 69,028. The cap on deduction in interest payment will stay at Rs 2 lacs.
What if the Residential Property is Let-out?
All the cases we have discussed above are for a self-occupied property.
Sometimes, you may not be able to use the purchased house for own use and may have to rent it out. The reasons could be many. For instance, you can stay in just one house. If you have more than one, you may to want to rent it out (or it will be deemed let out as per Income Tax laws).
What is the tax treatment in such cases?
The treatment of principal repaid remains the same (as in the case if the property was self-occupied).
However, in case of interest payment, the entire interest paid can be claimed as deduction. There is no cap of Rs 2 lacs in case of let-out (or rented) property. So, the entire interest income can be deducted from your rental income (or deemed rental income) to arrive at your Total Income from House Property. During the initial years of your loan repayment, the absolute interest payout is on the higher side. It may so happen the taxable Income from House Property (after accounting for standard deductions and interest cost) is negative. In such a case, you can adjust this loss under other heads including salary. In case this is not possible (not enough income to set off against loss), you can carry forward this loss for another 8 years. For more on how to calculate income from House Property, please refer to Section 23 of the Income Tax Act.
From FY2018, the benefit for loss under Income from House Property has been capped at Rs 2 lacs per financial year. Any excess loss can be carried forward for the next 8 years. I have discussed this aspect in great detail in another post.
Please note the requirement of completing the construction of house in
3 years 5 years applies only to self-occupied house. For a let-out property, there is no cap on tax- benefit for interest payment on home loan, even if the house is completed after 3 years 5 years. For the self-occupied property, the maximum tax benefit would have fallen to Rs 30,000 if the house was not completed within 3 years 5 years.
Additionally, for a let-out property, even interest on loan taken for repair, renewal or reconstruction can be claimed as deduction (subject to the cap for loss under income from house property).
Can I take both HRA benefits along with Housing loan benefits?
Yes, you can. This can happen if you are not staying in the house you have purchased. There may be a case where the city where you have purchased house is different from the city where you work. You put your house on rent and stay in a rented accommodation. Alternatively, you may have house in the same city but cannot live in it due to some reason (distance from workplace etc) and have to rent it out.
In such a case, you can claim HRA (House Rent Allowance) tax benefits since you are staying in a rented flat. Additionally, now that your own house has become a let-out property, you can claim deduction for the entire interest paid (and not just Rs 2 lacs).
You should have a case why you are not living in your house. Suppose you own a house but you are living in rented flat in the same building just to save on taxes. If your case comes up for scrutiny, the assessing officer may have an adverse opinion on the matter and can decline the tax benefits.
Can the tax benefits already availed be reversed?
Yes, this can happen if you sell the house within five years from the end of financial year in which you got the possession or the construction was completed.
For instance, if you got the possession in July 2012, you cannot sell the house on or before March 31, 2018. In you do so, aggregate amount of tax benefits availed (for principal repayment) will be added to the total income for the financial year (in this case FY2018) and taxed accordingly (as per your income tax slab). This is in addition to the capital gains tax liability that might arise due to sale of house.
Please note tax benefits for interest payment availed under Section 24 shall not be reversed.
Can I avail these tax benefits for two home loans?
Yes, you can avail benefits for multiple loans. However, total benefit for principal repayment is still limited to Rs 1.5 lacs. It does not change with the number of loans.
For interest payment under Section 24, the benefit for the self-occupied property will be capped at Rs 2 lacs.
However, for the let out property (or properties), there is no such cap. The entire interest paid can be deducted from the income from House Property (Section 23).
You can choose any one property as self-occupied. Remaining will be automatically considered as let out house properties.
Can I borrow from a friend and avail tax benefits?
You cannot avail benefit for principal repayment under Section 80C if you have taken a loan from a friend or a family member. As per Section 80C, the loan must be availed from a bank, Housing Finance Companies, LIC, Central or State Governments. The exact list of eligible loans can be found in Section 80C of Income Tax Act. Loan from a friend or family member is not eligible.
However, you can avail benefits for interest payment under Section 24 even if you have taken loan from a friend. You must furnish a certificate from your friend specifying the interest amount paid during the financial year.
The tax benefits for home loans are linked to ownership of the house. Hence, for a property purchased through the builder, you must get possession of the house. For a house built on an own plot, the construction of the house must be completed before you start claim these tax benefits.
Moreover, to get the complete benefit of interest payment deduction under Section 24, the construction (or possession as the case may be) of the house (self-occupied property) must be complete within
3 three years 5 years from the end of financial year in which the loan was taken.
So, if you are planning to purchase an under-construction property, do keep these tax rules in mind. If the builder does not deliver on time, you will have to keeping paying rent and EMI at the same time for a long period. Not just that, your tax benefits will be compromised too.
A recap of tax benefits under various scenarios.
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