Understanding Tax Benefits on Home Loan (Updated)

For most young professionals, buying a house tops the list of priorities. Even those who do not believe real estate makes for a good investment, do not have second thoughts about purchasing a house to stay in. Not only does it give you the comfort of living in own house, it also provides financial security to your family.



With the home prices shooting through the sky in most cities, most people cannot afford to purchase their dream house outright. A home loan can help you bridge this gap. High EMIs (equated monthly instalment) can put some pressure on your cash flows. However, tax incentives offered on repayment of home loans can ease that pressure to an extent. Additionally, once you receive possession of your house, you also save on rent.

In this post, I will discuss various tax benefits for home loans and the associated finer details of the Income Tax Act. Let’s first start with the tax benefits that almost every home buyer is aware of. We will look into the finer details subsequently. Repayment of housing loan is eligible for:

  • Tax deduction of up to Rs 1.5 lacs for principal repayment on a housing loan under Income Tax section 80C in a financial year. Please understand the deduction limit of Rs 1.5 lacs is the combined cap for investment in all the products in the 80C basket such as PPF, EPF, ELSS, tax-saving FDs etc.
  • Tax deduction of up to Rs 2 lacs for payment of interest on a housing loan in a financial year under Section 24 of the Income Tax act. The actual deduction availed is the lower of actual interest paid and Rs 2 lacs. Tax benefit on interest paid can be availed for loans taken for repair of the house too but tax benefit, in such a case, shall be limited to Rs 30,000 per financial year.

What else is eligible for tax benefits under Section 80C and Section 24?

Apart from the principal amount on home loan, stamp duty charges and registration fees are also eligible for deduction under Section 80C. Hence, you can claim benefit under Section 80C for such expenses too apart from the principal amount.

Any processing fees for the sanctioned loan, service fees or any prepayment fees are also an allowable deduction under Section 24. These fees can be added to interest paid during the year for the purpose of claiming deduction.

When can I avail these benefits under Section 80C and Section 24?

The tax benefit under Section 24 and Section 80C is available only from the financial year in which the house is acquired or construction is completed. There is no tax benefit for principal repayment or interest payment for under-construction property.

For the interest paid prior to the financial year (in which the house was acquired), the interest paid  can be aggregated and the tax benefit can be claimed under Section 24 in equal instalments over the next five years (including the year in which the house was occupied).

For instance, if you take a Rs 20 lac loan for 20 years at 10% in the July 2012 and get the possession of the house in April 2015. Full EMIs began from August 2012. From August 2012 till March 2015, you would have paid 32 EMIs. You would have paid interest of Rs 5.21 lacs in the period. You can claim deduction of Rs 1.04 lacs (Rs 5.21/5) per year from FY2016 to FY2020. This deduction is in addition to the interest repaid during each of the years from FY2016 to FY2020. Please note total deduction u/s 24 shall be capped at Rs 2 lacs (for a self occupied property).

For claiming maximum benefits under Section 24, the construction of the house has to be completed or the house has to be acquired within 3 years from the end of financial year in which the loan was taken. If this condition is not met, then the maximum benefit under Section 24 (for interest payment on home loan) shall be limited to Rs 30,000 per financial year.

There is no such benefit for principal repayment for a under construction property. So, principal repaid, before the construction is over, is not eligible for any tax benefit. You will not get any benefit even if you were paying the full EMI during the period.

Can the Benefits Availed under Section 80C Be Reversed?

Yes, it can happen if you sell the property within 5 years from the end of financial year in which the possession of such property is obtained. In such a case, the aggregate amount of deductions availed for such housing loan in the previous years shall be added to the income of the assessee in the year of sale and taxed accordingly (as per income tax slab). This is in addition to any capital gains tax implications that may arise on sale of such assets.

Are There Any Tax Benefits for Loans Taken for Home Renovation/Repair?

If the loan is taken for repairs, renewal or reconstruction, the deduction limit (for interest payment under Section 24) shall be capped at Rs 30,000. There is no provision for availing tax benefits beyond Rs 30,000 per financial year for loans taken for repairs/renovation/addition etc.

For any loans taken for any addition, alteration, renovation or repair of house property after issuance of completion certificate (or after the property has been occupied or let out), there is no tax benefit for principal repayment under Section 80C.

Double Whammy

Looking at fine print of Section 24 of Income Tax Act, if you do not get possession of your house within 3 years from the end of financial year in which loan was taken; it will be a double loss for you.

You are paying rent and EMI (or pre-EMI, as may be applicable) at the same time. Tax deduction on interest payment will come down to Rs 30,000 (from Rs 2 lacs). For someone in the highest tax bracket, this will result in maximum loss of ~Rs 56,000 per financial year. Additionally, there will be no benefit for principal repaid during the construction period.

For instance, if you took a home loan in July 2011 and you do not get possession of your house by March 31, 2015, you can avail a maximum tax deduction of Rs 30,000 per financial year (after you get possession of the house). A double whammy indeed.

If your builder does not deliver on time, not only do you have to go through a lot of mental agony, you might even have to go through a lot of financial pain.

What If the Property Is Not Self-Occupied?

  • The deduction for principal repayment under Section 80C shall be the same as in case where the property was self-occupied.
  • The entire interest paid on the home for such property shall be deducted from the rental income (notional rental income) to arrive at total taxable income of the owner. The exact method for calculation of rental income (income from house property) has been provided in Section 23 of the Income Tax Act.

Please note the maximum deduction on interest payment on a home loan (for a self occupied property) was subject to a maximum of Rs 2 lacs per financial year. However, if the property is let out for whole or part of the year, there is no limit on deduction.

The entire interest amount is deductible from your income from house property (as calculated under IT section 23). If there is a loss, it can be adjusted against income from other heads. If that is not possible, the loss can be carried forward for 8 years.

Therefore, it may make financial sense to rent out your home and stay in a rented accommodation. But then, every decision in life is not a financial decision.

Can I Avail These Benefits for Two Loans?

Yes, you can avail these benefits for more than one loan. The benefit under Section 80C shall be capped at Rs 1.5 lacs for all the loans. Benefits under Section 24 (interest payment) shall be as mentioned before. For the self-occupied property, the limit shall be Rs 2 lacs (or Rs 30,000 as the case may be).  For that house (or houses) that has been let out (or deemed to be let out), there is no limit. Entire interest paid can be deducted from income on house property.

What If I Borrow from a Friend?

Interest payment to a friend or a relative is eligible for deduction under Section 24. You will have to produce a certificate of interest payment from them. Expectedly, the friend/relative is liable to pay income tax on such interest income. There shall be no benefit on principal repayment under Section 80C. Such relief u/s 80C is available for loans taken from banks, LIC or other notified institutions.

Can I Avail Tax Benefits under Section 80C and Section 24 and Also Avail HRA?

If you are staying in a house owned by you, you cannot avail tax benefits for HRA (House rent allowance). You can avail tax benefits under Section 80C and Section 24 though.

If you own a house (taken on a home loan) but stay in a rented accommodation, you can claim tax benefits under Section 24 and Section 80C along with tax benefits for HRA. Total interest paid shall be deducted to arrive at income from house property.

Conclusion

You can see that the tax deduction under Section 24 and 80C are linked to completion of construction or possession of the property. So, if you are going for a under construction property, do keep these aspects in mind. Project delays are quite common these days. An under construction property might be cheaper but delays will cause not just mental agony but serious financial strain due to dual burden of rent and EMI and lesser tax benefits.



9 responses to “Understanding Tax Benefits on Home Loan (Updated)

  1. is it possible to claim Total Interest amount paid on Home loan against other head of income (salary income), in the case of house is a let out property.

  2. Hi,
    I have taken home loan and my family is residing in it but I am staying in other state and paying rent. Kindly advise, how can I avail this benefit.
    Regards
    Rah

  3. I own a property in one city, which is currently self occupied and in another city, which is let out. I am taking tax benefits on both properties home loan interest.

    Now I am renting out the property which is self occupied and moving on rent near to my office (in the same city).

    In this case, can I still take tax benefits on both my properties and HRA for rented property also? I am going to show rent also from my rented out property (which was self occupied).

  4. Hi
    I bought property this year. I am the co-borrower of home loan.
    My home is in different city and I live in other city. Currently,property is not on rent. If I put my property on rent and rent is taken by the other co-borrower of home loan then Will I be able to claim for the full interest on home loan ?

    Thanks!

  5. Hi experts!!
    I have small doubt related to housing loan. I purchased house for 28 lacks but registered for 12.5 lakhs. we have agreement for 28 laks. At the time of purchasing house i have eligibility of 12 laks only balance amount is borrowed from relatives.My questions are
    1) Can i avail tax deduction for 28laks?
    2) Is there any constraints on interest for the loan took from relatives?
    3) in section 24, interest refer to simple interest or compound interest?
    please clarify.
    Thanks in advance.

  6. Hi,
    I need expert advice for tax saving, please help. I have bought a property in the same district where I am working, but it is arount 50Km away from my working place. I am living in a rented house near my work place. How can I avail tax benefit on both (House loan repayment and rent paid).

  7. sir can we get deduction under section 24 for pre EMI interest? if Yes can we get that entire amount as deduction under section 24 in one financial year itself (subject to 2 lakhs limit)?

  8. I have taken two home loans; one each jointly with my wife and mother. Interest payment in a financial year in each the loans is more than 4 lacs. How much rebate can I claim on interest payment individually in the two loans ??

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