A very important criterion to be kept in mind while taking a Home Loan is the Tax Benefit on Home Loan. To explain the Tax Benefit on Home Loan, we would be dividing the Repayment of Home Loan into 2 components:-
- Repayment of the Principal Amount
- Repayment of the Interest on Home Loan
As the repayment comprises of 2 different components, the tax benefit on home loan is governed by different sections of the Income Tax Act and these are claimed as tax deductions under different sections while filing the Income Tax Return.
The Sections under which Tax Benefit on Home Loan can be claimed are explained below:-
Section 80C: Tax benefit on Home Loan (Principal Amount)
The amount paid as Repayment of Principal Amount of Home Loan by an Individual/HUF is allowed as tax deduction under Section 80C of the Income Tax Act. The maximum tax deduction allowed under Section 80C is Rs. 1,50,000.
This tax deduction is the total of the deduction allowed under Section 80C and includes amount invested in PPF Account, Tax Saving Fixed Deposits, Equity Oriented Mutual funds, National Savings Certificate, Senior Citizens Saving Scheme etc.
This tax deduction under Section 80C is available on payment basis irrespective of the year for which the payment has been made. The Amount paid as Stamp Duty & Registration Fee is also allowed as tax deduction under Section 80C even if the Assessee has not taken Loan.
However, tax benefit of home loan under this section for repayment of principal part of the home loan is allowed only after the construction is complete and the completion certificate has been awarded. No deduction would be allowed under this section for repayment of principal for those years during which the property was under construction.
Moreover, in case you are planning to buy an under-construction property as it is priced at a lower price as compared to a fully completed property, you are here also requested to note that GST is also levied on under-construction Property. However, no Service Tax is levied on properties on which construction has been fully completed.
House Property should not be sold within 5 years
Section 80C(5) also states that in case the assessee transfers the house property on which he has claimed tax deduction under Section 80C before the expiry of 5 years from the end of the Financial Year in which the possession has been obtained by him, then no deduction and tax benefit on Home Loan shall be allowed under Section 80C. The aggregate amount of tax deduction already claimed in respect of previous years shall be deemed to be the Income of the Assessee of such year in which the property has been sold and the Assessee shall be liable to pay tax on such income.
Tax benefit on Home Loan (Interest Amount)
Tax Benefit on Home Loan for payment of Interest on Home Loan can be claimed as Deduction under Section 24 as well as under the newly inserted section 80EE (Inserted in the Budget 2013, to be applicable from 1st April 2013)
Section 24: Income Tax Benefit on Interest on Loan for Purchase/Construction of Real Estate
Tax Benefit on Home Loan for payment of Interest is allowed as a deduction under Section 24 of the Income Tax Act. As per Section 24, the Income from House Property shall be reduced by the amount of Interest paid on Loan where the loan has been taken for the purpose of Purchase/ Construction/ Repair/ Renewal/ Reconstruction of Property.
The maximum tax deduction allowed under Section 24 of a self-occupied property is subject to a maximum limit of Rs. 2 Lakhs (increased in Budget 2014 from 1.5 Lakhs to Rs. 2 Lakhs).
In case the property for which the Home Loan has been taken is not self-occupied, no maximum limit has been prescribed in this case and the taxpayer can take tax deduction of the whole interest amount under Section 24.
Please Note: In case a property has not been self-occupied by the owner by reason of the fact owing to his employment, business or profession carried on at any other place, he has to reside at that other place not belonging to him, then the amount of tax deduction allowed under Section 24 shall be Rs. 2 Lakhs only.
It is also important to note that this tax deduction of Interest on Loan under Section 24 is deductible on payable basis, i.e. on accrual basis. Hence, deduction under Section 24 can be claimed on yearly basis even if no payment has been made during the year as compared to Section 80C which allows for deduction only on payment basis.
Moreover, if the property is not acquired/constructed completed within 5 years from the end of financial year in which the loan was taken, the interest benefit in this case would be reduced from 2 Lakhs to Rs 30 thousand only. (Limit increased from 3 years to 5 years from FY 2016-17 onwards).
The Quantum of Deduction allowed for payment of Interest on Home Loan under Section 24 has been summarized below:-
|Type of Property||Self Occupied Property||Not Self Occupied Property|
|Completion Status||Completed within 5 years||Not completed within 5 years||Completed within 5 years||Not completed within 5 years|
|Deduction Allowed||Rs. 2,00,000||Rs. 30,000||No Limit||No Limit|
Budget 2017 Update
In case of non-self occupied property, the interest paid is reduced from the Rent paid to arrive at the Income from House Property. In some cases, it may happen that the Interest paid is more than the Rent earned which will result in Loss from House Property. This Loss is allowed to be set-off with Income from any other head.
The Finance Act 2017 announced on 1st Feb 2017 has put a restriction to the maximum amount of Loss under head House Property that can be set-off from other heads of Income. From Financial Year 2017-18 onwards, Loss of a maximum of Rs. 2 Lakhs is allowed to be set-off with Income from other heads. The amount which is not set-off shall be carried forward to future years.
These new provisions inserted in the Income Tax Act have been very nicely explained in this link – Income Tax Treatment of Loss from House Property.
Income Tax treatment of Pre-Construction Interest
In many cases, amount is paid for the purchase of property even before the construction is completed. Some home buyers, purchase properties on loan before the completion of construction and start paying EMI to the Bank.
In such cases, Section 24 very specifically states that Tax Deduction for payment of Interest shall not be allowed before the construction is complete. In such cases,
- If Loan is taken for purpose of Repair/ Renewal/ Reconstruction: No Tax Deduction allowed for Interest paid before Completion
- If Loan is taken for the purpose of Purchase/ Construction: The Interest that has been paid before the completion of construction should be aggregated and the whole aggregated amount shall be allowed as tax deduction in 5 equal installments for 5 successive Financial Years starting from the year in which the construction has been completed.
For eg: Mr. A purchases a House in New Delhi in 2009 and took a loan of Rs. 10,00,000 from a Bank paying Interest @ 10% p.a. The Construction was completed in April 2011.
Now, As per Section 24 of the Income Tax Act, tax deduction for payment of Interest would only be allowed from financial year 2011-12 onwards. However, the Interest paid on Loan before the completion of Construction (i.e. Rs. 2,00,000) would be allowed as tax deduction for the next 5 Financial years @ 40,000 p.a. commencing from Financial Year 2011-12 onwards. (Easy amounts have been taken in this example for simplification purposes)
- Interest paid for outstanding amount is not allowed as Tax Deduction (Shew Kissan Bhatter v. CIT (1973) 89 ITR 61(SC)
- This tax deduction shall be available only if the construction is completed within 3 years from the end of the financial year in which the capital is borrowed
- Taxpayer cannot claim any deduction for Commission Paid for arranging the Loan
- If the taxpayer is not earning any income from house property, but is paying Municipal Taxes and Int on Home Loan, this would lead to Loss under head Income from House Property. This loss arising under head Income from House Property is allowed to be set-off against income from various other heads in the same Financial Year.
- In case the loss cannot be set-off against income from other sources in the same financial year, the loss can be carried forward to future years and set-off against income arising from House Property for the next 8 financial years.
- Tax Benefits of Interest on Home Loan can be claimed only by the person who has acquired or constructed the property with the Borrowed Funds. It is not available to the Successor of the Property.
For the purpose of simplicity and easy understanding, a comparison of Tax Benefit on Home Loan under Section 24 and Section 80C has been made here under:-
|Particulars||Section 24||Section 80C|
|Tax Deduction allowed for||Interest||Principal|
|Type of Property||Any Real Estate Property||Only Residential House Property|
|Basis of Tax Deduction||Accrual basis||Paid basis|
|Quantum of Tax Deduction allowed||Self Occupied Property:Rs. 2,00,000. Non Self Occupied Property: No Limit||Rs. 1,50,000|
|Purpose of Loan||Purchase/ Construction/ Repair/ Renewal/ Reconstruction of a Residential House Property.||Purchase / Construction of a new House Property|
|Eligibility for claiming Tax deduction||Purchase/ Construction should be completed within 5 years||Nil|
|Restriction on Sale of Property||Nil||Tax Deduction claimed would be reversed if Property sold within 5 years|
Section 80EE: Income Tax Benefit on Interest on Home Loan (First Time Buyers)
Arun Jaitley while announcing the Budget 2016 re-introduced Section 80EE which provides for additional Deduction of Rs. 50,000 for Interest on Home Loan. This incentive would be over and above the tax deduction of Rs. 2,00,000 under Section 24 and Rs. 1,50,000 under Section 80C.
This Deduction of Section 80EE would be applicable only in the following cases:-
- This deduction would be allowed only if the value of the property purchased is less than Rs. 50 Lakhs and the value of loan taken is less than Rs. 35 Lakhs.
- The loan should be sanctioned between 1st April 2016 and 31st March 2017.
- The benefit of this deduction would be available till the time the repayment of the loan continues.
- This Deduction would be available from Financial Year 2016-17 onwards.
The above 3 Sections relating to Tax Benefits on Home Loans have been summarised as under:-
Quantum of Deduction (Rs.)
Self Occupied Property
Non-Self Occupied Property
- The above tax deductions are per person and not per Property. So in case you’ve purchased a property jointly and have taken a joint home loan, each person repaying the amount would be eligible to claim whole deduction separately.
- If you are living in a rented premise and are taking Tax Benefit of HRA Allowance, even then you can claim Tax benefit on home loan under Section 24, Section 80EE & Section 80C.
For claiming the above tax deductions, you would be required to furnish the statement provided by the lender clearly indicating the amount payable and paid towards Interest and Principal. After claiming the above deductions of Tax Benefit on Home Loan, the balance Income of an Individual would be taxed as per the Income Tax Slab Rates. (Recommended Read: Income Tax Slab Rates)
If you need further assistance regarding Tax Benefits of Home Loan, you can book an appointment with the author of this article and get all your queries resolved – Book an Appointment with CA Karan Batra