Home Loan Tax Benefit
In addition to making the dream of owning your house possible, the home loans also help you save taxes on the interest payments and principal amount repaid. Let us discuss the benefits available for home loan.
How much interest on home loan is tax deductible?
Section 24(b) of the Income Tax Act, allows you tax saving on home loan for interest on home loan taken to buy, construct, or repair or reconstruction of a residential as well as commercial property. Even the processing fee paid for home loans or pre-payment charges for home loan paid are also treated as interest for income tax purpose and thus the tax saving on home loan is available for the same as well. The home loan can be taken from anyone, including your friends and relatives, as long as you are able to prove its actual use for the specified purpose.
The quantum of deduction for interest on home loan will depend on whether the property has been let-out or is used for your own residence. For a self-occupied property, the home loan tax benefit for interest is restricted to Rs 2 lakh. However for a let-out property, you can claim full interest oh home loans against the rental income of the property. If you have more than one self-occupied houses, you have to select any one house as self-occupied and the other houses is treated as let-out. In such a case, you have to offer notional rent for taxation on such deemed to have been let-out property and can claim full interest payable for money borrowed for this purpose.
Thought you can claim home loan benefit for full interest on home loan taken for let out property or property treated as deemed to have been let out but the loss under the head income from house property can only be set off against your other income like salaries or business income to the extent of two lakhs rupees in a year and any loss remaining unabsorbed under the head “Income from house property” due to home loan interest can be carried forward for set off against income from House property for next eight years.
For an under-construction property, the payment of EMIs normally does not start till the construction is completed unless there is inordinate delay in construction. For such property the tax benefit on home loan does not start till construction is complete and you take possession of the property. You can claim this benefit for the whole year even if you have taken possession on 31st March of the year.
For the period during which the property is under construction, you still need to pay interest on the disbursements made during that period but before the construction is completed and possession taken. This is called Pre-EMI interest. The total of Pre-EMI interest paid during the construction period can be claimed in five equal installments beginning from the year of completion of construction.
This is within the limit of Rs 2 lakh in case of self-occupied house property. However, in case you sell the under construction property before completing five years after taking possession, the claim for the remaining years is lost. However in case the property is sold before taking the possession, the interest paid on such loan can be claimed as cost while computing your capital gains.
Additional home loan benefit for interest on small value house
In addition to the home loan benefit for interest under Section 24(b), Section 80 EE allows interest benefit to small house of a value not exceeding fifty lakhs for home loans taken from financial institutions like banks and housing finance companies. So in case the home loan is sanctioned between 1st April 2016 and 31st March 2017 and the amount of home loan does not exceed thirty five lakhs for the property upto fifty lakhs you are entitled for a tax benefit on interest on home loan upto fifty thousands rupees every year provided you did not own any house on the day the home loan is sanctioned. This tax benefit on home loan is available even during the construction period as the condition of completion of house property is not applicable here.
Home Loan Tax Benefit on Principal Amount
Under Section 80C, an individual and an HUF can claim a home loan benefit upto Rs 1.50 lakh for principal repayment of home loan taken for a residential house along with other eligible items like life insurance premium, NSCs, EPF, ELSS and stamp duty and registration charges etc. This tax benefit of home loan can only be claimed home loan taken from specified entities such as banks and housing finance companies etc. This benefit is also available after the house is completed. You need to retain the house for minimum five years from the end of the year in which the home loan was taken failing which the home loan benefit allowed for repayment shall be reversed.