Home loan can be burdensome as you think the interest outgo squeezes your income. But on the contrary, it actually helps you save more money by providing a breather from taxes, writes Brijesh Parnami, Chief Executive Officer, Destimoney Advisors
By Brijesh Parnami
Tax outgo skims the hard-earned money you make out of your jobs and businesses. However, to be a responsible citizen, there is no other way out.One has to submit taxes without a fail, to allow the government to take up tasks meant for creating better services and infrastructure for its people.
To ease the tax burden, the government from time to time provides breather in the form of tax rebates.
One of the effective tools for saving tax is a home loan. By purchasing a house, you not only become eligible for tax deductions but also a proud owner of a home.
The sole aim of the government to provide lucrative tax breaks on home loan is just to push people to purchase properties. By doing so, it keeps the housing segment booming, the ripple effect of which is seen on other sectors as well.
Home loans are a great way to save tax and enjoy long-term relief. Income Tax Act, 1961 states that loans can be used as tax-saving instruments too. After procuring a home loan for purchasing a property, a person can claim tax deductions on the principal amount as well as on the interest that he would be paying towards servicing the loan.
Tax benefits on home loans are available under the Income Tax Act Sections 24, 80C and 80EE. Only individuals and HUFs (Hindu Undivided Families) are eligible for the benefits. These tax benefits are available only on home Loans and not on Non-Home Loans such as loan against property (LAP) etc.
Tax benefit on home loans
Purchasing a home does not come easy. There is a fat chunk of money that that has to be paid as down payment and for the rest a home loan can be taken, for which one has to pay higher interest rates. But this home loan is your saviour from the taxes that you have to pay year after year. As home loans are for long term, one can enjoy the tax benefits on it during the designated period for which the loan has been sanctioned.
Tax benefits are available on two components of a home loan — Principal amount and the Interest. While the benefit on principal repayment can be availed under Section 80C, the same can be claimed on the interest repayment under Section 24. The UPA government had introduced Section 80EE in the budget 2013-14 offering additional tax benefits on interest repayment, with certain riders. First time buyers were who took home loan in the financial year 2013-14 became eligible for availing additional tax benefit on Rs 1 lakh for interest payment over and above the tax deduction available under Section 24.
For unutilized interest, the deduction was available for financial year 2014-15 as well. This additional tax saving means provided people more room to save extra bucks. But the government did not extend it in the following years and this year too there was no mention of Section 80EE.
For the financial year 2015-16, the benefits are available on Section 80C and Section 24 only.
Section 80C – On repayment of Principal Amount & Stamp Duty/Registration Charges
A. On repayment of Principal Amount
The amount that is repaid by the borrower towards the principal component of the home loan is allowed as tax deduction under Section 80C of the Income Tax Act. One can avail maximum tax deduction to the tune of Rs 1.5 lakhs under this section. This limit of Rs 1.5 lakhs is towards the total amount paid collectively for PPF, Tax Saving FDs, Equity oriented mutual funds, National Savings Certificates, among others.
The section does not allow the benefit during the years when the property is under construction mode. One can avail the tax deduction only after completion certificate has been given. However, important point to note is that a taxpayer can aggregate the interest that has been paid when the construction was on and can claim the deduction in five equal instalments in the five consecutive financial years, beginning the year during which the construction completes.
However, if the owner sells the property on which he has sought the tax benefit within the five years from the date of obtaining the possession then no tax deduction is allowed. If the assessee has availed tax benefits during this period, then it is treated as income and makes it liable for tax payment.
Also, the deduction is available on payment basis, notwithstanding the year in which the payment was made.
B. On stamp duty and registration charges
Section 80C also provides for tax deduction on the stamp duty and registration charges that are paid while purchasing the property. One can claim the deduction as prescribed in section 80C i.e. a maximum of Rs 1.5 lakhs and it is again the total amount paid collectively for PPF, Tax Saving FDs, Equity oriented mutual funds, National Savings Certificates, among others. The deduction can be claimed in the year in which these payments are made.
Section 24 – On payment of interest
In case of purchase of property, this benefit can be availed only when the construction of property is complete and the possession certificate has been provided. Other than purchase of property, the tax deduction is allowed on loans taken for construction, repair, renewal and reconstruction of a residential house property. The income on house property is adjusted with amount of Interest paid on home loan.
Rs 2 lakhs is the maximum deduction limit one can enjoy under this section in case of self-occupied property. Besides, if the property is not completed within three years from the date of loan sanction, the interest benefit comes down to Rs 30,000 from Rs 2 lakhs.
In case the property is not self occupied, there is no limit and one can claim the whole interest for tax deduction sake. However, there is a fine print here: If the owner does not self occupy the property and resides at any other place due to responsibilities related to job or business, then the deduction one can avail is only Rs 2 lakhs.
Unlike the deduction available under section 80C on payment basis, the deduction under this section is available on accrual basis. So the deduction has to be claimed on yearly basis even if even if no payment has been made during the year.
Disclaimer: Borrowers are advised to consult Tax Consultant/Chartered Accountant in all the cases.
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