For property purchase, Home Loan Tax benefits is the biggest motivator to avail home loan. In one of my previous post, i highlighted 5 Disadvantages of Home Loan. In this post, lets find out Home Loan Tax Benefits which can help you to take informed decision.
As we know that Home loan EMI is basically divided into 2 parts i.e. Principal Repayment & Interest Payment. Home Loan Tax benefits are linked to these 2 components with differential tax treatment.
Home Loan Principal Repayment
The deduction for principal repayment can be availed under Section 80C of Income Tax Act. The disadvantage is that this deduction is clubbed along with other components like contribution to EPF, Insurance Premium, School Fees, ELSS, NSC etc. The combined max limit under Section 80C is 1 Lac for financial year. In all probability, most of the Tax Payers exceed this limit. Another Home Loan Tax Benefit which is clubbed under section 80C is deduction for stamp duty and registration charges paid for the property. Deduction on stamp duty and registration charges can be availed only for the financial year during which the property is registered.
Word of caution: Deduction under section 80C is available only for purchase or construction of residential property. This deduction is only available for self occupied property not for let out property. All the deductions claimed under this section 80C for principal repayment are reversible, if the property is sold within 5 years from the financial year in which possession is taken or property is bought. Deductions claimed during 5 years will be treated as income for the financial year in which you sold the property and you need to pay tax on same.
Home Loan Interest Payment
Under section 24(b) of Income Tax Act, deduction is available for Interest component of Home Loan. Unlike principal repayment deduction u/s 80C, deduction on interest payment is available for purchase, construction, repair & reconstruction of both residential & commercial property.
Many home loan borrowers are not aware that even the Processing Fees paid at the time of availing Home Loan or any Prepayment fees (Penalty) to prepay or close the home loan can be clubbed under section 24(b) for deduction on Home Loan Interest Payment. This deduction is available for both self occupied and let out property.
Maximum deduction under section 24(b) for self occupied property is 1.5 Lac & for let out property there is no limit i.e. deduction is available on actuals during the financial year.
One of the most commonly asked question is whether Home loan tax benefits are available for under construction property. Answer is Home Loan Tax benefits start from the financial year in which construction is completed & buyer gets the possession of the property. Deduction on principal repayment is not available for under construction period even if you were paying FULL EMI during under construction period instead of Pre-EMI. The interest paid (Pre EMI or interest component in FULL EMI) during under construction period can be claimed in 5 equal installments from the financial year in which construction is completed or Buyer gets the possession of House.
Now million dollar question which many readers ask me that they have take Home Loan from their parents, relatives or friends, can they avail Home Loan Tax Benefits. Answer is
(a) “NO” for deduction under section 80C for Principal Repayment. For claiming principal repayment deduction under 80C, The Home Loan should be availed only from Govt regulated (RBI or NHB) Home Loan Lenders like Banks & HFC’s or any other Govt Institution.
(b) “YES” for deduction under section 24(b) for Home Loan Interest Payment. If you have taken loan from relative or friend than you can claim deduction for Interest payment u/s 24(b).
Interest Payment deduction under section 80EE
For the financial year 2013-14, an additional deduction of 1 Lac is available for Interest Payment provided following conditions are fulfilled by the borrower.
1. Loan amount should be less than or equal to 25 Lacs
2. The property value should not exceed 40 lacs
3. Borrower should not own any other property
4. Loan should be availed, sanctioned & disbursed only during financial year 2013-14
5. Property should be self occupied
With so many stringent conditions, i am not sure if anyone availed Home Loan Tax Benefit under section 80EE.
If you have any query or question related to Home Loan Tax Benefit. Kindly post the same in following comments section
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