Know the Tax benefits of your Home Loan

Unless you are ultra rich, you cannot purchase a house without taking a home loan.

Government too recognizes that property prices have become uncomfortably high. So to help lessen the burden of home loan EMIs, it offers tax breaks to borrowers.

When you repay your home loan via EMIs, it includes principal as well as interest component. Both these components are eligible for exemptions under different sections of Income Tax Act:

• Principal repayment is available for deduction under Section 80C
• Interest payment is available for deduction under Section 24(b)
• Additional tax benefits offered to first-time buyers under Section 80EE

Important Note - All tax benefits are available only after the property is complete and the buyer gets possession. So if your property construction/delivery gets delayed, your tax benefits will also get delayed.

Your Home loan EMIs are made up of 2 parts - Principal Repayment + Interest Payment. Lets see how each can get you tax benefits.

Tax Benefits on Home Loan Principal Repayment

Section 80C allows home loan borrowers to claim upto Rs 1.5 lac exemption on repayment of the principal component of the loan.

Do note (again) that this deduction is available for completed properties and not for under-construction property.

Interestingly, Section 80C also allows you to claim deduction for a variety of other investments and expenses - like PF, VPF, PPF, ELSS mutual funds, tax-saving FD, life insurance premiums, etc.

The total available deduction under this Section 80C from all investments is Rs 1.5 lac. So if (for example), your PPF contribution in a year is Rs 70,000, ELSS funds investments is Rs 50,000, then you can only claim Rs 30,000 as a home loan principal repayment deduction (even if its actually more than Rs 30,000).

Tax Benefits for principal repayment can be reversed if the property is sold within 5 years (of getting possession / completion).

Tax Benefits on Home Loan Interest Payment

Section 24 allows home loan borrowers to claim exemption for the interest paid as follows:

• Rs 2 lac for self-occupied house
• No limit (!!) for non self-occupied house(s)

The property must be completed within 5 years of taking the home loan. If completion takes more than 5 years, then annual interest exemption is capped at Rs 30,000.

You cannot claim tax benefit on interest payment unless the property is completed.

But unlike in case of principal repayment, you are allowed to retrospectively claim benefits on the total interest for the pre-construction period, in 5 equal installments from the year the construction is complete. Let’s take an example to understand this.

Suppose you take a home loan for under-construction house in August 2012 and start paying EMIs. The construction gets over in January 2015 (+ you receive the completion certificate).

Assume your year wise interest payments as follows:

• FY 2012-13 = Rs 80,000 (Aug-2012 to Mar-2013)
• FY 2013-14 = Rs 1,00,000 (Apr-2013 to Mar-2014)
• FY 2014-15 = Rs 90,000 (Apr-2014 to Mar-2015)

Now the total interest paid (upto the financial year) before completion of construction is Rs 1.8 lac (Rs 80,000 + Rs 1,00,000). This is the total interest payment made between Aug-2012 and Mar-2014.

As you know, you cannot claim interest deduction unless property is complete. But once it is, you can claim this amount in 5 equal installments of Rs 36,000 each, starting from FY:2014-15. So for next 4 more years, you can claim deduction of Rs 36,000 annually.

This is in addition to deduction that you will claim for regular interest payment.

So for FY2014-15, you will be claiming Rs 36,000 + Rs 90,000 under Section 24(b).

Remember, that overall limits of Section 24(b) are applicable while adding these deductions.

First Time Buyer? Section 80EE offers Additional Tax Benefits

Additional deduction of Rs. 50,000 for interest on loan is available for first time buyers. This deduction is over and above the deductions of Rs. 2 lac under Section 24 and Rs 1.5 lac under Section 80C.

Apart from being a first-time buyer, following conditions need to be met:

• Value of property purchased should be less than Rs 50 Lacs
• Loan being taken should be less than Rs 35 Lacs.

Earlier, this deduction was available only for two financial years. But now, this benefit can be claimed every year, till the loan is fully repaid.

Other Important Points to Note

Jointly borrowing to purchase property?

Tax deduction can be claimed by both borrowers, in ratio of their ownership.

For example, if the total loan payment is Rs 7 lac (Rs 2 lac principal + Rs 5 lac interest), then both can claim Rs 1 lac each under section 80C (for principal) and Rs 2 lac each under section 24(b) (for interest) if it’s a self-occupied house or Rs 3.5 lac each, if the property is not self-occupied.

Have multiple properties with Home loans?

You can claim tax benefits for principal repayment and interest payment for all houses simultaneously.

But benefit for principal repayment for all properties (combined) is capped at Rs 1.5 lac under Section 80C.

Interest payment is eligible for Rs 2 lac deduction for one self-occupied property and for other properties, there is no limit.

Summary

Here is a summary of available tax benefit for home loan borrowers:

So these are tax benefits available to you as a home loan borrower. As you can see, both principal and interest components of the loan are eligible for tax benefits.

But remember that these benefits are available only for completed property. So if you are planning to purchase an under-construction property, do understand that any delay in construction can delay your tax benefits too.

Also, a home loan is the biggest loan you will ever take. So borrow only what you can repay and don’t go overboard just because of tax benefits.