Buying a home is a dream for almost everyone, but it comes at a big financial cost. Generally, taking a home loan includes lump sum upfront cost, and monthly EMIs for 10, 20 or for 30 years. The Indian government has shown a great inclination to encourage its citizens to invest in it and this is the key reason that a home loan is eligible for tax deduction under section 80C. The home loan tax benefit is one of the upsides of a housing loan; it reduces tax outgo.
Housing loan is eligible for tax benefits under three sections of the IT Act. Basically, your housing loan consists of two components i.e. principal and interest. You may be eligible to claim housing loan tax benefit on the two components based on some certain criteria. In order to avail this, firstly you must be the owner or a co-borrower (in case you have applied in joint housing loan).
An individual can claim for house loan tax benefit on the principal repayment under section 80 C. In addition to this, one can claim deductions on stamp duty and registration charges too. A borrower can claim National Saving Certificates, Life Insurance Premium, Employee Provident Fund, and Equity Linked Saving Scheme along with the housing loan to get an overall deduction of INR 1 Lakh in a year.
It is referred to as a popular way of claiming deductions on your home loan. Always keep in mind that commercial property and home renovations are not eligible for home loan tax benefit in India.
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The multiple tax benefits that a tax-payer can enjoy are:-
A Deduction on the Principal Repayment: The principal portion of the EMI paid for the year under section 80C is allowed to deduct. The maximum deduction allowed is of INR 1, 50,000, but to claim home loan tax benefit, the property should not be sold within 5 years of its possession. Otherwise, the deductions claimed earlier will be added back to your income in the year of sale. A borrower can also claim for the amount paid towards stamp duty, and registration charges under the same section.
Deduction for Interest Paid on Home Loan: Generally, any loan has two major components- principal repayment and interest repaid. A borrower can claim home loan tax benefit up to INR 2 Lakh under section 24 for the interest portion of the EMI on an accrual basis. Hence, a borrower can claim on a yearly basis even if no payments have been made during that year.
If home loan is taken to reconstruct, repair or refurbish, you won’t get any tax deductions on the interest paid. In addition to all this, a borrower can claim only INR 30,000 for deduction, if the house is not constructed within three years, i.e. the period when a loan was taken to the end of financial year.
Hence, a home loan taken by a borrower for the purchase or construction of a house must be completed within 5 years from the end of the financial year in which loan were taken.
Deduction for First Time Home Buyers: Under section 80EE, a borrower can claim for deduction of up to Rs 50,000. In order to claim home loan tax benefit, the amount of loan taken should be INR 35 lakh or less and the overall value of the property does not exceed 50 lakhs.
How To Claim Tax Benefits:
Need not to mention that you must be an owner of the property to claim the deductions and in case, if you are a co-owner, then you need to find out your share. In order to claim housing loan tax benefit, a borrower should provide the documents proving the completion of the construction of the house or the date you purchased.
A borrower can also claim pre-construction interest too as it is allowed in five equal installments starting from the year in which the house is purchased or the construction is completed. In addition to all this, a certificate from the lender that splits between the interest and principal amount details and municipal taxes paid during the year.
The tax benefits have to be claimed at the time of filing your IT return and need to inform your employer too in a timely manner.