With a home loan, you can reduce your tax liability by taking benefits that are available to you under different sections of income tax act. In this article we will discuss different income tax benefits that you can get by taking a home loan.
Home loan EMI has two components. One is your principal amount and the other component is interest charged on the home loan.
Income tax benefits can be taken on your housing loan’s principal and interest component that you pay to your bank every year.
Tax Benefits On Principal – Section 80C
Section 80C allow you to claim tax deduction up to an amount of Rs. 1.5 lakhs for investing in various investment schemes and options. One of those options is payments towards principal component of a home loan.
If you have taken a home loan for purchase or construction of a residential house property, then under section 80C you can include payments towards principal amount as an eligible amount for tax deduction of up to Rs.1.5 lakh along with PPF, life Insurance and others.
However, if the housing loan is for renovation or for additions or repairs for an existing house then payments towards principal component will not be eligible for tax deduction.
If the house has been sold within 5 years from the end of the year in which possession has been taken, then all such deductions that are allowed earlier under section 80C will be withdrawn and will be treated as your income for the year in which you have sold the house property.
If you are planning to sell your house on which section 80C tax deduction has already claimed, then our suggestion is to wait for 5 years and then sell it to minimize your liability.
Tax Benefits For Home Loan Interest Payments
Section 24 deals with income tax benefits on interest components of housing loan. As per this section, interest payable on housing loan taken for the purpose to buy or construct a house is eligible for taking such benefits.
Even if loan taken for repair or reconstruction of an existing house property is eligible for tax benefits under this section. This benefit is not allowed in section 80C as it deals with only principal components of housing loan.
If the house for which you have taken the loan is a let out property then the whole amount of interest payable or paid can be claimed as tax deduction. In case of self occupied house property, this deduction will be restricted to Rs. 1.5 lakhs per annum. You can claim these benefits only after taking possession of the house.
For the under construction period you can accumulate the interest portion for 5 years and then from the year of possession you can claim income tax deductions in 5 equal installments. This is in addition to the current year’s interest paid or payable for the financial year after taking possession. After claiming pre-construction period interest for 5 years, you will be claiming only the current year interest.
To claim income tax benefits on interest portion, you do not have any restriction on selling of house property i.e. if you are selling the house within 5 years from the end of the year in which you have taken possession then your earlier deductions on payment of interest will not be taxed.
To claim these income tax benefits you are required to produce a certificate from the bank specifying interest and principle amount paid or payable for the financial year. If you are an employee then it’s required to furnish to your employer or else you can keep it with you to produce it to assessing officer if asked for.
How joint home loan can be a better tax saving option
Instead of applying for home loans in your individual name, you can apply jointly to get higher loan facility and at the same time both can get higher income tax deductions. This benefits is available on your principal and interest component of home loan.
In case of self occupied property the income tax deduction for interest on home loans is Rs. 1, 50,000. There is no restriction on number of claims i.e. if you jointly owned a house then each one of you will be treated as owner to claim deduction under section 24 i.e. each joint owner can claim Rs. 1, 50,000 per year.
However, for a house which is let out on rent, each joint owner can claim deduction for the full interest amount as there is no limit on this. Rs.1, 50,000 tax benefits as we discussed above is available only for self occupied house property.
Tax benefits will depend on the proportion of share that each owner has on the property. If you are holding only 40% share then first calculate your portion of interest paid or payable and then restrict it to the maximum deduction allowed under section 24.
Income tax deduction for the principal portion of home loan can also be claimed by each co owner subject to the maximum limit of Rs.1, 50,000 as specified under section 80C.
If both husband and wife are working, then joint home loan can be a better tax saving option. You both can take benefits by claiming interest as well as principal amount as deduction from your income. To claim this benefits you are required to produce a certificate from the bank stating the interest and principal amount separately for the whole financial year.