Home Loan Tax Benefits

So as to provide relief to the homeless and to boost construction activity in the country, the government of India has allowed some deductions on home loans under Income tax Act 1961. Under it different set of rules apply depending on the number of houses owned by an owner.

Home Loan Income Tax Benefits Section 80C, 24 and 80EE

In case of Owning a Single House:

Deduction under section 80-C of the Income tax act, on Principal repayment on home loan:

Normal deduction of income of Rs. 1.5 lakhs per year as allowed under Section 80C of the Income tax act, is available on principal repayment made on home loan EMIs paid during the financial year. All the expenses incurred on the process of transferring of the property like stamp duty, registration charges and other expenses related directly to the transfer are also allowed to be added to this principal repayment amount, for the purpose of deduction under Section 80C, of course, subject to a maximum deduction amount of Rs.1.5 lakhs. But the claim on these expenses have to be made in the same year when these expenses have actually been made. However, this deduction is subject to the underlined conditions;

  • The home loan must be for the purchase of a new built up house or for construction of a new house building.
  • There is an underlying condition that such property on which such deduction has been claimed has to be retained for a minimum period of five years from the end of the financial year, in which you purchased the built up house property or completed the construction and took possession of the property. In case you sell such property before completing these mandatory five years, all the deductions claimed earlier shall be reversed and added back to your income of the year in which the property is transferred.

Tax deduction under section 24, of income tax act in India on interest paid on Home loan:

The taxpaying house owner can claim a deduction of up to Rs. 2 lakhs on the interest paid in the financial year, on their home loan interest, in case they own only one house and now after the interim budget of 2019 it has been proposed to be extended to two houses, irrespective of whether one of these or both of these two houses are self occupied or vacant. However, if you have rented out both or any of the two, the entire interest paid on the home loan is allowed as a deduction.

Deduction under section 80EE of Income tax act on interest paid on Home- loan:

An additional deduction of rupees fifty thousand is allowed if you are first-time homeowners. Section 80EE recently added to the Income Tax Act, provides a first-time homeowners tax benefit of up to Rs. 50,000 on the interest paid on home loan. If you are able to satisfy the conditions of both Section 24 and Section 80EE, both the benefits shall apply consecutively to you. First, exhaust your limit under section 24 and then go on to claim the additional benefits under section 80EE. Therefore, this deduction is in addition to the Rs 2lakh limit under section 24. This deduction can be claimed till total of the loan is repaid.

There are some conditions to claim this benefit under section 80EE:

  • This house has to be the first and only house property owned by you.
  • The total value of this house should not be more than Rs. 50 lakhs.
  • The loan amount should not be more than Rs. 35 lakhs.
  • The loan has to be taken from some scheduled bank or a Housing Finance Company.

In case of Joint Owners / Co-Borrowers:

Each of the joint owners, who are also co-borrowers of home loan, can independently claim a deduction on interest paid on the home loan up to Rs. 2 lakhs as allowed under Section 24 of the Income tax act and deduction allowed on principal repayments, including stamp duty and registration charges, building insurance under Section 80C within the overall limit of Rs. 1.5 lakhs, for each of the joint owners. These deductions are to be claimed in the same ratio as that of their ownership share in the property.

Simply being co-borrower is not sufficient to be entitled to claim the allowed deductions on the income tax, you have to be a joint owner of the house property also. For example the property is owned by a parent and he together with his son takes a loan where both sign as co-borrowers. Even if the loan is totally repaid only by the son yet the tax benefits on the home loan cannot be claimed by the son.

Deduction of Interest vs. Status of Construction:

The period from the date of disbursement of loan until construction of the house is completed is called pre-construction period. This deduction on home loan interest cannot be claimed during this pre-construction period.

  • Interest paid during this time can be claimed as a tax deduction in the next five assessment years in equal instalments, starting from the year in which the construction of the property is completed.
  • It can be claimed only from the assessment year the construction is completed. While in case of purchase of a constructed building, the allowed deduction can be claimed from the day the building is purchased and occupied.
  • In case the construction of the residential building is not completed within five years from the end of the financial year in which the loan was taken, the allowance of the deduction on interest gets limited to Rs. 30,000 only.

Regarding House Rent:

Scenario 1:

One is living in a rented house but one’s own house with a home loan running on it, is lying vacant.

Scenario 2:

One lives in a rented house and one’s own house is also let out:

In both cases, one can claim rent he is paying for the rented house as well as deductions as allowed under section 24, 80C and 80EE of Income tax act.

In case of ownership of a single house, these deductions can be claimed whether the house is self occupied, vacant or rented. Now after the interim budget 2019, this benefit has been extended to, in case of owning of even two houses by the same owner or any two houses in case of ownership of multiple houses, by the same owner.

In case the House is Let Out:

However, in case, one or both of the houses are even let-out, the total rent received is added to the owner’s main income however a standard deduction of 30% of the annual net value which means the total rent received during the assessment year, is allowed. This deduction is meant to cover, annual maintenance, fittings, building insurance etc., irrespective of the actual expenses incurred. However, the entire interest on housing loans of the rented property can be claimed as a deduction from the total income and there is no upper limit on the amount of interest that can be claimed as a deduction, under section 24 of the Income tax act.

Significant Budget Amendment in 2017:

If in case of a self occupied house, the interest paid on home loan exceeds the deduction on interest of Rs. 2 lakhs, as allowed under section 24 and Rs. 50,000 as allowed under section 80EE, in case it is applicable, the difference between the actual interest paid and the deductions allowed, is called the net loss on house property. Similarly in case of a let out properties, if the actual interest paid on home loan exceeds the total rent received in the year plus standard deduction of 30% as allowed on the total rent received in a year plus deductions as allowed under section 24 and 80EE. The difference between these two is termed the net loss on house property head in the income tax return. Till FY 2016-17, such loss under the head house property could be set off against other heads of income without any limit. However, by an amendment in 2017 by the government, from FY 2017-18 onwards, such set off of losses has been restricted to Rs. 2 lakhs per financial year. The balance could be set off, in consecutive eight years but the cap of Rs. 2 lakhs remaining for the subsequent years. Such loss can be adjusted only against income chargeable to tax under the head “Income from house property”.

In case of the Owner being a NRI:

All the deductions under section 80C or section 24 of the income tax acts and the standard deduction of 30% are also allowed to the NRI’s , in the same manner as Indian residents can do provided they file their income tax returns in India.

In case One Owns Multiple Houses:

However, in case of an individual owning more than one house, a different set of rules apply.

Scenario 1 (In case none of the properties is let out):

Current provision versus provision as proposed in the interim Budget 2019.

Earlier only one house property was considered to be as a self-occupied house property and normal deductions as allowed under section 80C and section 24 of the Income tax acts, as already discussed were allowed. But in case of more than one house properties, the second or third house despite being lying vacant were considered deemed rented property and a notional rent depending upon the quality of construction and their locality, were being assessed by the Income tax authorities and those rents were included in the owner’s main income and deductions towards interest repayment, which to make your claims easy, came with no cap, regardless of the construction status of the property. But, deductions under section 80C towards the principal repayment, could only be claimed on one of the houses, but the taxpayer is free to choose any of the properties as self-occupied house property based on his own discretion.

For the FY 2019-20 and onwards, after this interim budget proposals, you may have as many properties in your name, but government shall now consider two of your properties to be your ‘self-occupied’ properties in place of one. However, your maximum deduction as allowed under Section 80C and section 24 remains Rs. 1.5 lakhs and Rs. 2 lakhs respectively remains the same after aggregation on account of home loans of both the properties. The third and more houses in your name are categorized as deemed rented out. Here, the assumed rent income from these properties will be considered as your taxable income. The amount is decided based on the property rent rates of that area suitable for your property. The taxpayer still remains at liberty to choose any two properties as self-occupied house properties based on whichever property fetches the maximum benefit. The uncapped deductions on account of interest paid on third or subsequent houses can be deducted to the full but deduction on account of principal repayment under section 80C on the third or subsequent houses is not allowed.

Scenario 2 (In the case of Rented Houses):

As for as the rented houses are concerned, that might be first, second or third or so, the total rent received is added to the owner’s main income however a standard deduction of 30% of the annual net value which means the total rent received during the assessment year. Under Income tax act, it is meant to cover maintenance, building insurance premium of the buildings. However, the entire interest on housing loans of all the rented properties can be claimed as a deduction from the total income and there is no upper limit on the amount of interest that can be claimed as a deduction.

However, if the computation of rent and interest in respect of loans taken for all the properties in aggregate, results in loss from the house properties, then maximum of Rs. 2 lakhs of loss can be set-off against other heads of income and balance can be carried forward for 8 assessment years but that set off loss cannot be more than Rs. 2 lakhs per assessment year.Impact of amendment of 2017 and this proposal of 2019 on your tax savings.

The amendment of exempting income from two house properties may lead to lesser deduction of interest and corresponding amendment of 2017, restricting deduction of loss on house property only up to 2lakh a year, may lead to a taxpayer paying more tax in later years from the two self-occupied properties than what was paid before the Budget allowed total interest paid on a home loan on the second house was allowed a total deduction. This may happen in cases where the rentable value of the second property is less than the interest paid by the taxpayer for such property. “In such cases, prior to Budget, the taxpayer would have claimed deduction of the entire interest paid in respect of such property and would have set-off or carried forward the loss from such property. However, post-amendment, since the deduction of interest will be restricted to Rs 2 lakh in aggregate, the taxpayer will not be eligible to claim set-off or carry forward of such loss and thereby resulting in higher taxes.

Things you should know

  • Interest on housing loan can be claimed as a deduction only if the house property is constructed or purchased and ready to be occupied.
  • Interest paid prior to completion of construction of the property can also be claimed as a deduction over 5 years from the year of completion of construction. When the construction gets completed a completion certificate is issued after which you will also have to get an occupancy certificate, which is a must.
  • In case of property held jointly, the income from house property to be taxed in the hands of each co-owner is determined based on the deduction, you need to submit the home loan interest certificate that shows the ownership share, borrower details and EMI payments bifurcated into interest and principal.
  • Even if a house property is let out only for part of a year, then the house property would be considered as let out property for the entire year.

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