Tax benefits for interest on home loan can be claimed under section 24 of income tax act, 1961. To claim this benefit, you need to fulfill all the conditions of section 24.
The first and most important condition is the purpose of home loan.
As per law, interest on home loan is eligible for tax benefits only when it’s taken for purchase, or construction or repair or renewal or reconstruction of house property.
However, if you have taken home loan for reconstruction or repair or renewal of the house property, then no deduction is allowed for the interest in EMIs before completion of the property (i.e. for pre construction period).
Tax deduction under section 24 for Interest on home loan is allowed on payable or accrual basis. Hence, the owner is allowed to take benefits of section 24 on yearly basis even if no payment is made during the year.
However, section 80C benefits for repayment of principal amount on home loan is allowed on payment basis. This means if you have not paid it during the year, then deduction can’t be claimed under section 80C.
Tax deduction up to the maximum limit of Rs 2,00,000
If the house for which loan has been taken is self occupied, then, the maximum amount allowed as tax deduction under section 24 of income tax act 1961, is Rs 2,00,000.
In case the house is not self occupied, the whole interest amount accrued under section 24 will be allowed as tax deduction. This means no maximum limit has been prescribed if the house property is let out.
In case the owner of the house has to reside at any other place due to his employment or because the business or profession is carried out at such other place, then the amount of such deduction allowed under section 24 shall be up to Rs 2 Lakhs as it will be treated as self occupied house property.
To claim tax deduction of Rs 2,00,000, you need to complete the project within 5 years from the end of the financial year in which money is borrowed for construction of house. If it’s not completed, then deduction under section 24 for interest on home loan will be restricted to Rs 30,000.
This means if the property is not acquired or constructed or completed within 5 years from the end of the financial year on which the home loan is taken, tax deduction on interest on home loan under section 24 would be reduced from Rs 2,00,000 to Rs 30,000.
This deduction can be claimed starting the year on which the construction of the house is completed.
You can also claim pre-construction period interest as tax deduction by including it with the post-construction period interest.
For the pre-construction period interest on home loan, you need to divide the whole interest amount of the period with 5. This one fifth part has to be claimed every year for five years time (5 equal installments) in addition to the post-construction period interest on home loan incurred by you. However, total amount claimed should not exceed Rs 2,00,000.
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.
Tax deduction when house property is sold
Section 80C deduction will not be allowed if the assessee has transferred the house property before the expiry of 5 years from the ends of the financial year in which the possession has been obtained. In such case, the aggregate amount of tax deduction already claimed by the assessee shall be deemed to be income of such year in which the property has been sold.
However, such restriction is not in section 24. This means interest on home loan already allowed as tax deduction under section 24 will not be treated as income of such year in which the property has been sold.