Tax benefits on home loan – All you need to know

Home loan not only helps you owning your dream house but also offer several tax benefits if you plan wisely. It’s important to understand all such tax benefits before applying for a home loan.

You can claim following tax benefits

  • Section 80C tax deductions for repayment of principal amount on home loan
  • Section 24 deduction for interest accrued on home loan.
  • Loss from house property
  • Additional deduction u/s 80EE for first time home buyer

Tax deduction for Principal amount paid for repayment of home loan

Section 80C of income tax act 1961 allow an individual and HUF to claim upto a maximum limit of Rs 1,50,000 tax deduction from assessee’s gross total income if conditions to the section is fulfilled.

Section 80C listed certain investments or expenses such as contribution to public provident fund, contribution to employee provident fund, life insurance premium paid, tuition fees paid, NSC, principal amount paid on home loan etc. By investing in these schemes or on payment of listed expenses, you can claim tax deduction up to Rs 1.5 lakhs.

As one of such expenses mentioned in section 80C to claim tax deduction up to the maximum ceiling limit of Rs 1.5 lakh is principal amount paid on home loan, you can include it to the list if you have paid it during the financial year.

In this case you do not have any restriction on number of house for which you want to claim tax deduction. It doesn’t matter whether the house is self-occupied or let out.

However, your total aggregate payment towards repayment of principal amount on home loan can not exceed the maximum limit specified under section 80C i.e. Rs 1.5 Lakhs.

Please remember, section 80C deduction for repayment of principal amount on home loan is available only after you have taken possession of the property. This means if you started repaying your home loan before taking possession, then section 80C deduction can not be availed.

To claim tax benefits, you need to avail home loan preferably from a bank as loan taken from friends and relatives are not eligible for section 80C deduction.

You will also lose tax deduction under section 80C if you sell or transfer the house property within 5 years from the end of the year in which home loan is taken.

This means tax deduction can not be taken in the year of transfer and all tax deductions taken in the earlier years for the house property under section 80C will be reversed and taxed in the year of such transfer.

Section 80C deduction can be claimed only after the completion of construction. It also allow payment of registration fee and stamp duty as a deduction from your taxable income.

Tax benefits for Interest on home loan

An individual can claim tax deduction under section 24 for interest accrued on home loan taken for purchase, construction, repair or renovation of the housing property whether residential or commercial.

For the purpose of section 24 tax benefits you need to first determine two things:

  • Occupancy of the house property
  • Status of completion

For the purpose of tax deduction on interest on home loan, it’s not mandatory that you should avail the loan from a bank or financial institution. You can claim deduction even if the home loan is taken from your friends or relatives.

In case of self occupied property, the maximum amount allowed as deduction on interest accrued on home loan is restricted to Rs 2,00,000 per annum. Rs 2 lakh deduction is available only if the construction is completed within a period of 5 years from the end of the financial year in which money is borrowed.

In case the construction is not completed within a period of 5 years from the end of the financial year in which money is borrowed for construction of  house, then tax deduction under section 24 will be restricted to Rs 30,000.

This means instead of claiming Rs 2,00,000, you have to claim Rs 30,000 as tax deduction if the construction continues beyond 5 Years.

To claim Rs 2,00,000 as tax deduction, you have to complete the construction within 5 years from the end of the financial year in which money is borrowed for construction.

This deduction can be claimed starting the year on which the construction of the house is completed. For instance if the construction of the house is completed on august 30, 2018 then you can claim deduction for interest for the entire 12 months in the financial year 2018-19. This means in the year 2018-19, you can claim tax deduction for interest incurred on home loan up to a maximum limit of Rs 2,00,000. If the house is rented then the entire interest incurred on home loan during the year 2018-19, can be claimed as deduction under section 24.

Tax benefits for pre-construction period interest

Pre-construction period starts from the date of borrowal of the home loan up to the end of the financial year immediately preceding the financial year in which construction is completed.

For instance, if the date of borrowal is 13th march 2013 and possession has been taken on 15th March 2018, then pre-construction period is 2012-13 to 2016-17. You can not take interest accrued for the year 2017-18 as part of pre-construction period even though construction is completed at the end of the year 2017-18.

For the under construction period, you can amortise the interest portion and claim it in 5 equal installments, starting from the year in which construction is completed or possession is taken.

However, pre-construction period is allowed only when home loan has been taken for purchase or construction of the house.

If you have taken home loan for reconstruction or repair or renewal of the house, then no deduction is allowed for the interest in EMIs before completion of the property.

After completion, you need to add 1/5th of pre construction period interest to the current year interest to claim deduction under section 24. However, the total deduction should not exceed Rs 2,00,000 when the house is used for own residence or reserved for own occupation.

Please remember, interest for the year in which construction is completed or possession is taken should not be claimed as part of pre-construction period interest.

Let out property

If the house property is let out, you are entitled to claim the whole interest incurred on home loan as tax deduction under section 24. This means, in this case you don’t have any maximum ceiling.

In case you have more than one house property occupied by you, then you have to select one as self-occupied and automatically the other one will be treated as deemed let out property.

If any property is treated as deemed let out, then you need to calculate rent on notional rental income that the property expected to fetch in the market. In such cases, interest on home loan taken for self occupied property will be restricted to Rs 2 lakhs or Rs 30,000 as the case may be and on the deemed let out property, you can claim full interest incurred with respect to such deemed let out property.

When you claim two properties as self-occupied

When you have more than two house property and home loan has been taken for to construct, repair, renew or renovation of such properties, then you have the option to choose two property as self-occupied and all others as let out. This benefit is proposed in our interim budget 2019. If its passed, then you can avail the benefit with effect from 1.4.2019.

However, tax deduction for both the self occupied properties selected by you will be restricted to the maximum ceiling of Rs 2 Lakhs or Rs 30,000 as the case may be. For the let out property/peperties, you can avail tax deduction for the whole interest incurred on home loan.

Loss under the head income from house property

Generally interest that you incurred for taking a home loan, is subtracted from your rental income to arrive at income from house property.

If your house is self-occupied and you have claimed interest on home loan as tax deduction, then the loss that you arrived at under the head income from house property can be set off against your other income.

This means if you are a salaried individual and taken home loan for construction, repair or renewal or renovation of a house and such house is self occupied, then the loss arrived under the head income from house property can be set off against your salary income.

To claim loss from house property, you need to submit a certificate from the bank showing interest and principal payments or incurred by you during the financial year along with a verified calculation showing loss from house property. After receiving such statement along with proof, your employer will allow such set off.

Loss under the head income from house property can also be claimed if the property is let out.

If you have any unadjusted loss under the head income from house property, then it can be carried forward and set off against income from the same head, over the next 8 years. It helps you in reducing your taxable income and the tax you pay thereon.

Additional benefits for first time home buyer

Government has introduced section 80EE to provide tax benefits to first time home buyer. Rs 50,000 additional tax deduction is allowed under section 80EE over and above the limit of Rs 1,50,000 under section 80C and section 24 benefits.

Tax benefit under section 80EE is available till the time of repayment of the home loan.

However to claim additional tax benefits under section 80EE, you need to satisfy following conditions;

  • Value of the house property is less than Rs 50 lakh
  • Home loan taken on the house property is less than Rs 35 lakh
  • Home loan must have been sanctioned after 1.4.2016 and before 31.03.2017

If you own a house on home loan and paying rent on another house property, then you can claim tax deduction in both the cases only when both the houses are in different cities.

In such case, you can also take benefit of pre-construction period interest accrued before completion of the property.

In case you are working as a employee, then your employer will be asking you for tax proof at the end of the year. You can submit interest certificate from bank and home loan account statement to the employer in order to claim above tax benefits. In addition to these documents, for loss from house property you need to submit a statement by calculating loss from house property.

Tax benefit for home loan are for each individual not for each property. If you have applied for a joint home loan or already availed then each person repaying the home loan will be eligible to full claim tax benefit under section 80C, 24 and 80EE.

How joint home loan can be a better tax saving option

Instead of applying for home loans in your individual name, you can apply jointly to get higher loan facility and at the same time both can get higher income tax deductions. This benefits is available on your principal and interest component of home loan.

In case of self occupied property the income tax deduction for interest on home loans is Rs. 1, 50,000. There is no restriction on number of claims i.e. if you jointly owned a house then each one of you will be treated as owner to claim deduction under section 24 i.e. each joint owner can claim Rs. 1, 50,000 per year.

However, for a house which is let out on rent, each joint owner can claim deduction for the full interest amount as there is no limit on this. Rs.1, 50,000 tax benefits as we discussed above is available only for self occupied house property.

Tax benefits will depend on the proportion of share that each owner has on the property. If you are holding only 40% share then first calculate your portion of interest paid or payable and then restrict it to the maximum deduction allowed under section 24.

Income tax deduction for the principal portion of home loan can also be claimed by each co owner subject to the maximum limit of Rs.1, 50,000 as specified under section 80C.

If both husband and wife are working, then joint home loan can be a better tax saving option. You both can take benefits by claiming interest as well as principal amount as deduction from your income. To claim this benefits you are required to produce a certificate from the bank stating the interest and principal amount separately for the whole financial year.

is a fellow member of the Institute of Chartered Accountants of India. He lives in Bhubaneswar, India. He writes about personal finance, income tax, goods and services tax (GST), company law and other topics on finance. Follow him on facebook or instagram or twitter.