You are aware that you get tax benefit of up to Rs 1.5 lacs for principal repayment under Section 80C of the Income Tax Act. You are also aware about tax benefit of up to Rs 2 lacs for interest payment for a housing loan for a self-occupied house. In case the house is not let out, there is no maximum limit on the tax benefit for interest payment.
There are many more aspects about home loan tax benefits that you must be aware of. Let’s look at 8 such aspects in this post.
1. You Get the Tax Benefits Only Once You Get the Possession or the Construction of House Is Complete
Tax benefits for home loans do not start from the day you start paying EMIs.
There is no tax benefit until you get the possession of the house (or the construction of the house is complete). You may be paying your home loan EMIs regularly. However, if you have not got possession of the house, you wouldn’t get any tax benefit for interest and principal payments.
However, there is some relief for interest payments before possession.
For interest paid before possession (the financial year in which you got the possession), you can add up interest paid before possession and claim as deduction under Section 24 in five equal installments (including the financial year in which you got possession).
Unfortunately, there is no such relief in case of principal repayment before possession. Principal repaid before possession does not get you any tax benefit under Section 80C.
2. Tax Benefits Are for Purchase of Residential Property
If you have taken a loan for repair, renewal or reconstruction of existing property, there is no tax benefit for principal repayment under Section 80C. Tax benefit under Section 80C is limited to construction or acquisition of the house.
Tax benefit for interest payment for such loans is capped at Rs 30,000 per financial year.
3. Stamp Duty, Registration Fee and Loan Processing Can Also Be Considered for Tax Benefits
Tax benefits for home loan are not merely restricted to principal repayment and interest payment. Stamp duty and registration fee can be considered for deduction under Section 80C.
Home Loan processing fee can be considered for deduction under Section 24 of the Income Tax Act.
4. Tax Benefits for Principal Repayment Under Section 80C Can Be Reversed
Tax Benefits for principal repayment can get reversed if you sell the residential property within 5 years from the end of financial year in which you got the possession (or the construction was completed).
So, if you got possession in July 2012 and you sell the property on or before March 31, 2018, tax benefit for principal repayment under Section 80C will be reversed.
Fortunately, tax benefits for interest payment under Section 24 are not reversed.
5. For Maximum Tax Benefits, You Must Get Possession Within 5 Years
If you do not get possession of the house within 5 years from the end of the financial year in which loan was taken, tax benefit for interest payment is capped at Rs 30,000 (instead of Rs 2 lacs) per financial year.
In fact, this deadline was increased from 3 years to 5 years in Union Budget 2016 only. This move by the Government must have brought some relief to many home loan borrowers.
Delays in possession have become quite common. Not only do such buyers have to pay rent and home loan EMI at the same time, but their tax benefits can also get drastically reduced.
There is a lot of confusion in relation to construction linked loans. Since the loan is disbursed in many installments, which disbursement should be considered for calculating five years? First disbursement or last disbursement?
In my opinion, first disbursement should be considered for the purpose of calculating 5 years since that was the time when the capital was initially borrowed.
Do note this limitation is applicable for only self-occupied properties. For let-out properties, there is no such rule. You get tax deduction for the entire interest paid irrespective of delays in possession of the house.
6. You Can Borrow from a Friend and Still Avail Tax Benefits
You can avail tax benefit for interest payment under Section 24 even if you have taken a loan from a friend or a relative. However, you must furnish a certificate from the friend/relative specifying the interest amount paid during the year.
However, you will NOT get any tax benefit for principal repayment for such a loan. For benefit for principal repayment under Section 80C, the loan must be taken from a bank, Central/State Government, LIC, National Housing Bank etc. Complete list of eligible lenders can be found in Section 80C of the Income Tax Act.
7. You Get the Tax Benefit for Any Number of Residential Properties
You have taken loan for three houses. Let’s assume you have got possession for all three houses. One is self-occupied and the remaining two have been let out.
You can claim tax benefits for principal repayment and interest payment for all three houses simultaneously.
However, benefit for principal repayment for all three properties combined is capped at Rs 1.5 lacs under Section 80C. Do note this cap of Rs 1.5 lacs also includes your investments in PPF/EPF, ELSS, tax-saving FDs etc.
For interest payment, you will get tax benefit of up to Rs 2 lacs for the self-occupied property.
For the two let-out properties, the entire interest paid is tax deductible.
8. In Case of Joint Home Loans, You Have to Be Both Co-Owner and Co-Borrower
If your spouse owns the property and you are paying EMIs, you CANNOT avail tax benefits. Ownership interest is mandatory if you want to avail tax benefits.
Similarly, if you are paying EMIs for residential property owned by your parents, you wouldn’t get any tax benefit.
Alternatively, you own the property with your spouse and the loan has been taken by your spouse. You are paying the EMIs in her place. You wouldn’t get any tax benefits since you are not a co-borrower in the home loan.
You have to be co-owner and co-borrower if you want to avail tax benefits.
Disclaimer: I am not a tax expert. You are advised to consult a Chartered Accountant for matters pertaining to taxation.