A Guide on Claiming Income Tax Benefits for Home Loan

Buying a home is a dream come true for many. As one takes a home loan to transform this dream into a reality, the government does its part by offering various tax benefits to home buyers. So, read ahead as we discuss how you can significantly decrease your property tax outgo by enjoying the following tax benefits for home loans in India:

What are the tax deductions in place?

The home loan repayment process involves EMI (equated monthly instalments), which has two components – principal repayment + the interest amount. Both these parts can be claimed as deductions under various sections of the Income Tax Act, 1961.

Deductions on principal amount under Sec 80C

As per Section 80C – the maximum deduction in the principal amount that can be claimed is up to 1.5 lakh rupees. This can also include stamp duty and registration, which can be claimed only once during the year these expenses are incurred. 

However, it is important to take note that the limit under 80C can easily be exhausted if one is already making payments for provident funds and insurance policies. This leaves lesser room from the 1.5 lakh cap limit for your principal amount deductions. Scroll through towards the end to understand how instead getting a joint loan can broaden the scope of deductions under this Section!

Conditions:

• The construction of the home must be completed within 5 years since the end of the financial year when one has borrowed the home loan.
  
• The house should not be put for sale within 5 years of possession. If it is sold before this period, any deductions that one has claimed will be added back to one’s income and taxed accordingly during the year of the sale.

Deductions on interest amount under Sec 24

For the interest amount – Section 24 allows home buyers the maximum deduction of 2 lakh rupees annually if the house is self-occupied or vacant. For those whose property is rented, there is no upper limit and the entire home loan interest becomes a deduction. However, the overall ‘loss from house property’ that can be claimed in this case is rupees 2 lakh.

If you have purchased an under-construction house on loan – you are still eligible to claim interest deductions but only after the property is fully constructed. In this case – the year from when you borrow the home loan to the time when the property is fully constructed is called the pre-construction period. 

After you acquire the constructed property – Sec 24 of the Income Tax law now allows you to claim a deduction for the pre-construction period over and above the other deductions you are otherwise eligible for. This pre-construction interest deduction is capped at 2 lakhs annually and is provided in 5 equal instalments. To know more about pre-construction interest deduction, you can have a look at this case study by cleartax.com

Conditions:

• The construction of the home must be completed within 5 years since the end of the financial year when one has taken the home loan. In case this doesn’t happen, the deduction will be capped to 30,000 rupees only.
• One must have taken the loan after 1st April, 1991.

P.S. Sec 24 is also applicable for home owners who have not taken a home loan but instead purchased the home entirely from one’s own funds. In this case – a flat 30% deduction can be claimed by the homeowner if it is not self-occupied.

Additional benefits on interest for first-time home buyers under Sec 80 EE & 80EEA

First time property buyers are often given even more tax benefits for home loans in India. This is done to encourage more people to finally take a leap and buy their very own residential property. 

a) Under Sec 80EE

To make property purchase more appealing for first-time buyers, Sec 80 EE was first introduced in 2013 for two years and then reintroduced for the financial year of 2016-17. Under this section, one could claim an annual deduction of up to 50,000 rupees over and above the deductions claimed under Sec 80C and Sec 24. 

Conditions:

• The loan must be sanctioned between 1st April 2016 to 31st March 2017. It is not applicable for those applying for new home loans after this period.
• The purchaser must be a first-time home buyer who does not own any other property. 
• The value of the property must not exceed 45 lakhs. 

b) Under Sec 80EEA

Budget 2019 saw additional interest deduction benefits for first-time homebuyers through Sec 80EEA. Under this, one can claim a deduction of 1.5 lakh rupees in a year over and above the deductions claimed under Sec 80C and Sec 24. This has been extended now until 31st March 2022.

Conditions: 

• Only those buyers are eligible for Sec 80EEA who are not already claiming the deductions under Sec 80EE. 
  
• The purchaser must be a first-time home buyer who does not own any other property. 
• The value of the property must not be more than 45 lakhs, where one can borrow a loan of up to 35 lakhs. 

How can getting a joint home loan give greater benefits?

• If one takes a joint loan with a family member or spouse, then each of the co-owners can individually claim a deduction in the principal as well as the interest components of the loan if they have separate sources of income. To claim these deductions, both the co-owners must also be listed as co-borrowers of the loan. The amount of deductions that can be claimed by each co-owner depends on the ratio of ownership share in the property. 
• In this way, the tax benefits get doubled as each co-owner individually claims principal tax deductions of 1.5 lakh under Sec 80C, which in total, amounts to 3 lakhs annually. Similarly, for the interest component, each can avail up to 2 lakhs, in total amounting to 4 lakh in interest deductions per year.
• Moreover, first-time owners can combine the benefits of Sec 24 and Sec 80EEA by individually claiming up to 3.5 lakh of annual interest deductions each, which amounts to a cap of 7 lakhs in interest deductions per annum!

What is the process of claiming the tax benefits?

• Ensure that the property purchased is in your name.
• Calculate the total amount that can be claimed as tax deductions.
• Ensure that you submit the ‘home loan interest certificate’ to your employer so that he can adjust the tax deductions at source (TDS) accordingly. This certificate consists of information that includes details about ownership share as well as EMI payments.
• If you do not submit this certificate, then you may have to claim the refund at the time of ITR tax filing.

At Ashwin Sheth Group – we’ve given you a detailed breakdown of all the tax benefits you can claim while securing a property home loan. We hope that the article may be helpful in your quest to own a beautiful dream home for you and your family.

*Source Cleartax, Pixabay