A guide to claim tax benefits on Home Loans

Buying a home is a big step. Considering the zooming property rates in last 15-20 years, buying a home is not easy. It becomes almost impossible for lower and middle class people to buy a home and those who are buying the home also find it difficult to purchase the same from their own saving without getting a home loan. Home loan has become necessity to buy a home. Buying property with a home loan not only gets you an asset but also entitled you to several tax benefits. Here is an analysis of how you can save money by availing these benefits. To lighten the burden of a home loan on borrowers, the government offers several tax concessions. Although most of the people may be broadly aware of tax benefits on home loan, there are other several nuances that need to be focused.

Principal repaid on home loan

Under the Section 80C of the Income Tax Act (IT Act), one can claim a maximum of Rs 1.5 lakh of the principal component of his/her monthly EMI. If in case the principal outgo is below Rs 1.5 lakh, one can invest it in a tax-saving instrument to exhaust the limit. Please note the deduction limit of Rs 1.5 lacs is the combined cap for investment in all the products in the section 80C basket such as ELSS, EPF, PPF, tax-saving FDs etc. And, also apart from the principal amount on home loan, registration fees and stamp duty charges are also eligible for deduction under Section 80C. These benefits, however, come with a couple of limitations. Purchaser can claim these benefits only when his/her house is fully constructed and also he/she should be first time buyer. Secondly, purchaser should know that he/she can’t avail of these benefits on principal repayment, if he/she sells the home within five years of taking possession. If one does it, he/she will have to reverse the deduction. This means that all the deduction one has availed of so far, would be treated as income in the year of sale and taxed entirely.

Interest repaid

Tax saving benefits are also available on interest repaid on a home loan. Although, the deduction is different for a self-occupied property than for a home that one intends to rent out.

Self-occupied: Under Section 24 of the Income Tax Act, if Individual has taken a home loan to purchase a home that he/she intends to live in, the interest paid on this home loan is eligible for a deduction up to Rs 2 lakhs. This deduction is only available after one has received possession of the house. Please understand, construction of the house must be completed within 3 years from the end of the financial year in which the home loan was taken. The interest paid while the home is under construction, will continue to accumulate. After getting the possession, one can claim deduction on this amount for 5 years. So, if one has paid a total interest of Rs 6 lakhs while the home was under construction, he/she can avail of a deduction of Rs 1.2 lakhs for the next 5 years after possession. In case purchaser doesn’t receive possession within 3 years of taking the home loan, he/she can only claim a deduction of Rs 30,000 each year. In case if individual’s job is in another city and he/she doesn’t live in the home that bought for self-use, then the home will be treated as self-occupied and one may avail of deduction on interest repaid up to Rs 2 lakhs.

Second property: If one buys a second property from which he/she intends to earn rental income, the deduction on interest repaid, is even more generous. Here, one can claim the entire interest repaid as a deduction. However, one will have to show the rent that he/she earns from the property, as ‘income from housing’. This will be added to one’s total income. However, purchaser is entitled to deductions on rental income. First, one may deduct all the taxes such as property tax that he/she pays on the home. One can also avail a deduction of another 30% for maintenance and repairs.

Deduction on home loan insurance: If individual bought a home loan insurance cover along with the home loan, under Section 80C, one can avail of deduction on the premium paid. “You can see that the tax deduction under Section 80C and 24 are linked to completion of construction and possession of the property. So, it is advisable to go for constructed property and even if you are going for an under construction property, do keep these aspects in mind.”