Tax Benefits on Housing Loans for Home Buyers

Let’s understand the amount of money that you can save...

Income Tax Saving on Home Loan for FY 2020-21 (AY 2021-22)

Tax benefits are one of the important consideration when planning to take a housing loan.Tax benefits on housing loan are provided under section 24, section 80C and section 80EE of Income Tax Act, 1961.

For a better understanding of these benefits, let us divide the discussion into two parts on the basis of components of EMI.

• Payment of Principal amount
• Payment of Interest amount

Before we understand these in detail, let first understand if you are eligible for claiming these tax benefits.

So, Who can claim tax benefit on home loan?

For claiming the tax benefit on home loan you must be fulfill one basic requirement common with all the income tax sections.

You must be the bearer of both the titles, i.e., owner of house property and the borrower of loan for the property. Only ownership alone or being a borrower of funds alone cannot reap you these benefits. Though, you may be a co-owner or a co-borrower.

So, if you are thinking of buying a home in your wife’s name and paying the EMI from your income, Then, unfortunately you will not get any tax benefit:(

Overall only an individual or member of hindu undivided family can claim tax benefits on home loan. No company, partnership firm or body corporates is allowed the benefit of home loan interest & principal deduction.

Income Tax Deduction for Home Loan Repayment of Principal Amount u/s 80C :

You can avail deduction under section 80C of the Income Tax Act for the principal amount repaid during the financial year.The maximum deduction allowed under this section is of Rs. 1,50,000. So, if you have paid more than Rs.1,50,000 as the principal component, you will not be able to get any tax benefit for the remaining amount.

Conditions for claiming home loan deduction under 80C are:

• Deduction for repayment of principal can be claimed only after the completion of construction of property. For instance : The construction completion certificate was issued by the competent authority in March 2021, then the principal amount repaid during the financial year 2020-21 can be claimed entirely in the income tax return of that year to the extent of Rs. 1,50,000. However the principal repaid if any prior to the FY 2020-21 cannot be claimed in the return filed for the FY 2020-21.
• The deduction shall be allowed only for the repayment of loan borrowed for the purposes of purchase or construction of house property. Hence, principal repayment of loan borrowed for the purposes of alteration, renovation or repair doesn't qualify for claiming deduction under the section 80C.
• Loan should be taken from financial institution only as defined by the income tax Act, 1961. Normally, Repayment of loans borrowed from individuals doesn't qualify for deduction under 80C. However, the interest paid on sum borrowed from individuals shall be allowed as deduction under section 24 of the Act (discussed below).
• Deduction is allowed only when the principal amount is actually paid. Thus, if your EMI for March’21 is paid in the month of April’21. You will not be able to claim the principal amount paid in the month of March’21 in the income tax return filed for the F.Y. 2020-21.March month EMI can be claimed in next year return.
• After claiming the deduction,the property should not be sold before the end of 5 years of possession. Otherwise,the aggregate amount of deduction taken till date, shall added back in the income of year of sale of house.

Amount of Income Tax Deduction for Payment of Housing Loan Interest u/s 24:

Houses are not build in a day, it is a long process involving purchase of land, landscaping, construction of basic structure then furnishing,interiors etc. Hence, money is required & invested at every stage even before your house is ready to move in.

The good news is that the tax benefit of interest paid on home loan,for both the pre-construction and post construction period can be claimed by you! Deduction for the interest paid on home loan can be claimed under Section 24 of The Income Tax Act 1961.

The interest is divided in two categories - Pre-construction/Acquisition & Post Construction/Acquisition

• A. Pre-Construction Period Interest : It start from the date of borrowing and ends on the 31st March just before the date of completion or the date of repayment of loan, whichever happens first. Interest on pre-construction period is calculated using a simple formula : = Home Loan taken for the purchase or construction of house *Rate of Interest* Pre-acquisition period/pre-construction period It is allowed in five equal installment from the year in which the construction is completed.
  Condition for claiming the Pre-Construction/Acquisition Interest: Income tax Interest Deduction on pre-construction period is allowed only in case of loan taken for the purchase or construction of your house.: No Tax Deduction allowed for Interest paid before Completion,if housing loan is taken for purpose of Repair/ Renewal/ Reconstruction.
• B. Post-Construction Period Interest : Interest on loan after completion of construction is called the post construction interest.

Case study to understand how much interest on housing loan will be exempt from income tax u/s 24:

If you take a home loan of Rs.50,000 @15 percent per annum for the construction of your home on 1st June 2011 and construction of house is complete on 1st Jan 2017.Then,the total interest tax exemption= Pre-Construction Interest + Post-Construction Interest

The pre-construction period will be from 1st June 2011 till 31st March 2016(31st March just before the date of completion).

Interest for pre-construction period will be = (50,000*15%*10/12)+(50,000*15%*4) = Rs.36,250

Amount of installment deductible in five equal installments = 36,250/5= Rs.7,250 per annum

The post-construction period will be from 1st April 2016 till the time of repayment of the home loan (even, when the property is completed on 1st Jan 2017, interest of the entire financial year will be treated as the post construction interest)

Amount of interest per year post construction will be = 50,000*15%*1= Rs.7,500

Now, the next question that come to one’s mind is

What is the limit/amount of income tax deduction in a year for the interest on home loan?

There are certain limits specified by the Income Tax Department. These limits varies according to the nature of use(own use or let-out) for which house would be used for which the loan is being borrowed.

Self-Occupied House Amount of Tax Deduction on Interest : When you take a home loan for own residence then the total limit for tax deduction including the pre-construction period and post-construction period interest that can be claimed in a year are:

Rented-Out House(Including deemed let-out property) Amount of Tax Deduction on Interest :

If you buy a house for the purpose of renting it has a different tax limit for the interest deduction. Moreover, when you own more than one house ,than one property of your choice is considered as self-occupied and others as deemed to be rented out(let- out), by the Income tax department.

In both the cases, the entire interest on the home loan is allowed as deduction. The interest here includes the post-construction period interest for the year plus one-fifth of the pre-construction period claimed in the current year.

Conditions for claiming the tax benefit on interest on home loan under section 24 are:

• The deduction of interest u/s 24 is available on due basis, unlike the deduction for repayment of principal which is available on actual payment basis. Thus, even when you have not paid any EMI's during the year,you can still claim tax benefit for interest deduction.
• You need to have interest certificate specifying the amount of Interest on Loans.
• Interest paid for prior period shall not be available for deduction in case of repair, renewal and Reconstruction.
• Above limits are applicable only if construction is complete within 5 years

In Addition, to the interest tax deduction benefit under section 24, income tax department provides additional interest deduction under section 80EE specially for the first time home buyers.

Income tax deduction for first time home buyer in India under section 80EE :-

An individual is given extra tax benefit amounting to Rs.50,000/- for interest paid on the home loan.The benefit of this deduction is given over and above interest deduction taken under section 24.

Condition for availing the tax benefit under section 80EE of income tax act 1961 are:

• At the time of taking loan, you must be buying your first house.
• Amount of loan shall not exceed Rs.35 lakhs
• Value of property shall not exceed Rs.50 lakhs
• Loan must be taken from Financial Institution and housing finance company
• Loan must be sanctioned between 01.04.2016 to 31.03.2017

Income Tax Benefits on Home Loans

In Addition, to the tax deduction on the principal and interest component, you can further reduce the cost of your house by saving tax.

Smart tax saving tips, to maximise your tax benefit on purchase of your home-

• Stamp duty and registration charges: You can take benefit of the stamp duty and registration charges paid at the time of purchase of home under section 80C upto Rs.1,50,000. Unlike tax deduction of principal repayment of home loan which can be claimed only after the house is complete, these expenses can be claimed anytime in the year of payment irrespective of the fact whether any loan has been acquired or deduction.
• Processing fee and service charges: Processing fees levied on any loan taken is part of service charges, and any kind of charges taken by bank to render its services are tax deductible and form part of loan amount. For borrowing a loan, generally processing fees is charged by the bank. Processing fees or any kind of charges taken by bank to render its services are tax deductible.This can also be claimed as an interest expense under section 24 of the income tax act. However, no amount for the the amount paid to anyone (mostly your CA’s) for arranging the loan as commission or brokerage is not allowed as deduction.
• Being Joint holders of loan: This can be a good tax planning in case your spouse being co applicant of loan is an earning member. In case of earning members applying for loan in joint name both can individually leverage benefit upto Rs.2 lakh u/s 24 and 1.5 lakh u/s 80C, also they get enhanced loan limit based on aggregate earnings. Income saved is almost the income earned. So increase your savings to increase your income.

How to claim Income Tax Benefits on Home Loans?

For claiming the tax benefits on your housing loan all you need to do is just follow simple process:

• Calculate the amount of income tax deduction.
• Submit your home loan interest certificate and EMI statement to your employer at the time of income tax proof submission with your Form 12BB.

If you forget to submit these proofs to your employer, you can still claim the tax benefit at the time of filing your income tax return. If you are a self-employed, you are not required to submit these documents to anyone. In both the situations,it is advised to keep the record of the proof of the deduction claimed for future reference incase the IT department raises any question.

Income Tax Saving Benefits on Purchase of House

Homeownership can be an expensive affair, but the tax benefits of owning a home can help you save thousands and lakhs of rupees of taxes also. So, go on increase your tax benefits by planning your taxes before buying your dream home:)