The starting salaries of young professionals today are quite high thereby placing them in the tax bracket at the initial stage itself. Hence, the first question they ask is “Where can I get a home loan” to save on my income tax burden. Yes, the income tax benefit is a significant factor.
The Government of India has introduced various tax benefits for Home Loan borrowers. Let us glance through them briefly before moving on to discuss four lesser-known facts about tax deductions on home loans.
- Sec 80C of the Income Tax Act 1961 allows a maximum deduction of 1,50,000 on the repayment of the principal portion of theHome Loan. You get the benefit only if the construction of the house is complete.
- Sec 24 of the Income Tax Act 1961 allows deduction of the interest component of the Home Loan from the income from house property. In case of self-occupied or vacant homes, you can claim a maximum of 2,00,000 under this section. There is no maximum limit in case you let the house on rent.
- Sec 80EE of the Income Tax Act 1961 allows first-time homeowners an additional deduction of up to 50,000 on the interest component over and above the deduction permitted under Sec 24 of the Act. The significant conditions are that the value of the property and the loan should be less than Rs. 50 Lakhs and Rs. 35 Lakhs respectively. Also, you should have availed the loan between 01 April 2016 and 31 March 2017.
Everyone who has taken a loan for a home is aware of these three common deductions under various sections of the Act. We shall now discuss four lesser-known facts about the Income Tax concessions.
- Tax deductions for houses under construction:You cannot claim any concession under Sec 80C for homes under construction. However, you can claim the interest amount in 5 equal instalments for the next five years from the end of the financial year of possession. This simple example will clear the matter. Ashok has taken a loan of 30 Lakhs for constructing a house on 25th October 2010. The construction of the house is complete by 27th June 2012. In the meanwhile, Ashok has paid an amount of Rs. 4Lakhs as interest repayment. He can claim Rs. 80,000 per year for the next five years from 2013 to 2017.
- Selling a house bought with a Home Loan: Sec 80C of the Act is very clear when it states that you lose the tax benefits you have claimed the section if you sell the house within five The total amount of tax benefits will be added to your income in the year of the sale. For example, Rajesh had bought a house in 2012 and sold it in 2016. He had claimed a sum of Rs. 3Lakhs as tax benefits under Sec 80C for the four years. On selling the house, he will lose the tax benefits of Rs. 3Lakhs. He will have to add the amount to his salary in 2016-17 and treat it as his income. This condition is not applicable to the tax concessions on interest repayment under Sec 24.
- Loan availed for extension/renovation of the house: If you take a Home Loan for renovating the house, you cannot claim benefit under Sec 80C. You can claim the interest amount under Sec 24C up to a maximum of 30,000 for self-occupied properties. If it is a rented property, there is no ceiling at all.
- Loan availed from friends and family: Sec 24 of the Income Tax Act 1961 allows you to claim tax benefits on interest payment up to 2Lakhs. It is available even if you take the loan from friends and family members. However, you do not get benefit under Sec 80C because the section stipulates that you should have taken the loan from a bank or a financial institution.
A Bonus Tip:
You can claim income tax deduction on the processing fee you pay to the banks for processing your Home Loan application. There is a tribunal judgement in this matter. Processing fees are admissible, but the penal charges are not.
Now, you know the benefits available to you under various sections of the Income Tax Act 1961. You also know some of the lesser-known, but vital facts of the concessions allowed under the same sections of the Act. You can now calculate your tax deductions better.
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