Home loans are the most convenient option to fulfill the dream of buying your own house. In fact, a home loan is commonly popular for a purchase of property because of the tax benefits associated. The financial year 2017-18 has been an important year with new tax reforms such as the implementation of GST. The repayment of a home loan is divided into two components. It is important to know this before explaining the home loan tax benefits:
- Repayment of Principal Amount
- Repayment of Interest on home loan
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The tax benefits on a home loan are governed under different sections due to the division of repayment. Here are the sections under which home loan tax benefits can be claimed:
Section 80C (For Principal Repayment)
The Section 80C of Income Tax Act allows the amount paid by an individual/HUF as principal.
-The maximum tax deduction allowed under this section is ₹1,50,000.
-The tax deduction is available on payment basis irrespective of the year for which the payment is made.
-PPF Account, NSC, Tax Saving Fixed Deposits and more are included in the tax deduction amount.
-Section 80C also allows the amount paid as stamp duty and registration fee. This is applicable even if the assessee has not taken any loan.
-The completion of construction and completion certificate is required to claim the tax benefits. In fact, Section 80C does not allow the principal amount paid for years when the property was under construction.
-Under Section 80C, the property must not be sold within 5 years of possession. If the individual sells the house property before 5 years, starting from the year of Financial Year in which possession was obtained, the aggregated amount of tax claimed shall be deemed as income of the individual for the same year. This amount will become taxable.
Related: How To Calculate Income Tax For a Salaried Person in India
Section 24 (For Interest paid on home loan)
Section 24 of Income Tax Act includes the interest on the home loan as a tax deduction. The amount that can be claimed as a tax deduction under home loan depends on the type of property. It depends on whether it is self-occupied or not.
-The tax deduction on interest paid should be claimed on yearly basis. This is because the deduction on a home loan is on an accrual basis. However, Section 80C states that the tax benefit on principal repayment of the home loan is claimed on payment basis.
-The amount is paid before the construction of the property is complete in many cases. Section 24 especially states that:
-The interest paid before construction of property is not liable for a tax deduction if the loan is taken for the purpose of renewal, reconstruction, or repair.
-However, if the loan is taken for the purpose of construction or purchase, the interest paid before completion is calculated and allowed in 5 equal installments for 5 successive Financial Years starting from when the construction was complete.
Tax Deduction on Home Loan (For Self Occupied Property)
-You can claim a maximum amount of ₹2,00,000 as home loan tax deduction.
-If the property is not acquired/constructed/completed within 5 years from the end of the Financial Year in which the loan was taken, the interest benefit is reduced to ₹30,000.
Tax Deduction on Home Loan (For Not Self Occupied Property)
-If the property is not self-occupied, there is no maximum limit prescribed and the whole amount paid as interest is liable for a tax deduction. However, if the property is not self-occupied due to employment, business or professional reasons, then the limit of ₹2,00,000 is applicable.
-If the property is not acquired/constructed/completed within 5 years from the end of the Financial Year in which the loan was taken, the interest benefit will have no maximum prescribed limit. This is unless the reason for not self-occupying is due to the reasons mentioned above.
The income from the house property is calculated below in the case of not self-occupied:
Income from House Property = Rent paid – Interest paid
Sometimes, the interest paid turns out to be more than the rent paid which results in loss from house property. This amount can be set off with income from the other head. However, according to the Finance Act 2017, the maximum amount that can be allowed to be set off as loss from house property is ₹2,00,000 starting from Financial Year 2017-2018. The rest of the amount shall be carried forward in the future financial years.
To make it easier here is a tabular form to explain Section 80C and Section 24:
|
Particulars
|
Section 80C
|
Section 24
|
| Tax deduction allowed for |
Principal |
Interest |
| Maximum prescribed limit |
₹1,50,000 |
Self-Occupied- ₹2,00,000
Not Self-Occupied- No limit |
| Eligibility for Tax deduction |
NIL |
Purchase/Construction to be completed within 5 years |
| Restriction on Sale |
Should not be sold within 5 years of possession |
NIL |
Section 80EE (for first-time buyers)
While announcing the budget of 2016, Arun Jaitley reintroduced Section 80EE of Income Tax Act wherein the individual can claim an additional benefit of ₹50,000 for interest on home loan. The benefit was over the tax deduction allowed under Section 24 and Section 80C.
-The property you buy should be the first one you have bought.
-The value of the property must be less than ₹50 lakhs and the loan taken for the property should be less than ₹35 lakhs.
-Any recognized financial institution or Housing Finance Company must sanction the home loan.
-The loan should be sanctioned between 1st April 2016 and 31st March 2017. Moreover, the deduction would be available from Financial Year 2016-2017 onwards.
-The benefit of deduction is only available till the repayment of loan continues.
The above deduction is per person and not per property. Therefore, if a home loan is taken jointly, then both the individuals can claim the tax benefits on a home loan. Moreover, if someone is living in rented premises and is taking HRA allowance, then he/she is eligible for home loan tax benefits under Section 80C, Section 24 and Section 80EE.
You can save money on a home loan in other ways as well. Another easy way to save on your loan is by negotiating on your home loan interest rate. The negotiation can happen only if you check your free credit report online and see if you have an excellent credit score.
