How to Claim Tax Benefits on Home Loans

Most people make their dream of owning a house come true by taking a home loan to either construct a house or buy an apartment. Did you know that you can save on tax when you are repaying the home loan? Those who have taken a home loan are entitled to deduction under Section 80C, Section 24 and Section 80EE. Home loan repayment can be categorised into repayment of principal amount and the interest on the home loan.

Taxpayer can avail tax benefits under the following sections:

Section 80C:

Under Section 80C of the Income Tax Act, one can avail tax benefits on principal amount of the home loan. Maximum tax deduction allowed is Rs.1,50,000. The tax deduction is on the payment basis irrespective of the year for which the payment has been made. The amount paid towards stamp duty charges and registration fees is allowed for deduction under Section 80C. The stamp duty charges and registration fee charges are allowed for deduction even if you haven’t taken a home loan.

Tax benefit for repayment of principal loan amount is allowed after the construction of the house is complete.

Section 24:

Tax benefit is available on the interest that is paid towards the home loan under Section 24. The tax is deducted on an accrual basis. Maximum tax deduction allowed under Section 24 is Rs.2 lakh. This can be claimed on yearly basis even if no payments have been made during that year. If the house is not constructed within 3 years from the end of the financial year that the loan was taken, you will be allowed to claim only Rs.30,000 as deduction.

If loan is taken to repair, reconstruct or renew your house, then you won’t get any tax deductions on the interest paid. If the interest for the loan taken to purchase or construct the house has been paid before the house has been completed, then the aggregate of the amount is allowed for deduction in 5 equal instalments for 5 successive financial years.

Section 80EE:

Section 80EE offers tax benefit on interest paid on home loan for first time buyers. The loan must be sanctioned between 1^st April, 2013 and 31^st March, 2014. The loan amount cannot exceed Rs.25 lakh. The value of the residential property cannot exceed Rs.40 lakh. The deduction under Section 80EE cannot exceed Rs.1 lakh.

The extent of the tax benefit depends on if you are living in the house or if you have rented it out. It also depends on if you are the sole owner or are a co-owner. Let’s have a look at it in detail:

Scenario 1: If you are repaying the Home Loan under EMI Plan:

In the event you are repaying the home loan under EMI plan, you will be eligible to claim both the interest and principal component on the payment you make during that year. Heavy monthly EMIs will burden your cash flow. Therefore, government is offering tax benefits to reduce the EMI burden to a certain extent.

Deductions can be claimed as followed:

The interest paid up to Rs.2 lakh or the actual amount that you have repaid can be claimed as deduction under Section 24 of the Income Tax Act. The deduction on interest can be claimed only when you have the possession of the house.
Principal amount that you pay can be claimed to the maximum of Rs.1,50,000 under Section 80C. The limit across all investments under Section 80C is capped to a maximum of Rs.1,50,000.
Stamp duty charges and registration charges are eligible for deductions under Section 80C. This can be availed for the year in which you make the payment.
Processing fee for the sanctioned loan, prepayment charges and service fee is eligible for deductions under Section 24 of the IT Act.

Conditions that have to be met to avail the above Deductions are as Follows:

You will be required to show a statement that the lender provides showing that you have made the repayment for the year that includes the interest and principal components.
There is no tax benefit before you get the possession of the house.
If the house is not constructed within 3 years from the end of the financial year that the loan was taken, you will be allowed to claim only Rs.30,000 per financial year as deduction under Section 24.
The loan must be taken for construction or purchase of the house and not for repair, renewal and reconstruction.

How is the Deduction calculated on the Interest that is paid before taking Possession?

The interest that you have made payment for before the financial year in which your house construction has been completed will be aggregated and claimed as deduction under Section 24 of the IT Act in 5 equal instalments over next 5 successive years from the financial year that you get the possession.

For instance you have taken a home loan for Rs.20 lakhs at 10% interest per annum for 20 years in the month of July, 2012 and you get the possession of the house in January, 2015. The loan EMI stands at Rs.19,300.

You would’ve paid 21 instalments from July 2012 to 31^st March, 2014.

The total interest paid = Rs.3.45 lakhs

Principal amount included in the interest paid = Rs.60,170

The total principal amount paid is divided into 5 equal parts of Rs.60,028 and claimed as deduction for 5 successive years starting from the financial year 2015. This can be claimed till Financial Year 2019.

As you have now self-occupied the house after January, 2015, you will get regular deduction on your interest payment along with Rs.69,028. The cap for deduction is set at Rs.2 lakh each year.

Scenario 2: If you have let-out your Property:

If you decide to let out the property, the treatment for principal amount repaid stays the same. But the interest paid can be completely claimed as deduction. There is no cap of Rs.2 lakh on rented property. To arrive at your total income from house property, your entire interest income is deducted from your rental income. There is no cap on the tax benefit for interest payment even if the house is completed after 3 years for let-out property. Let-out property can claim deduction for loan taken for repairs, renewal and reconstruction without a limit.

You can also claim HRA if you have let-out your property and if you are staying in a rented place. But you cannot be renting out a flat in the same building that you are staying at just to avoid taxes.

Scenario 3: When the House is Owned and Self-Occupied by more than one Person or you own the House jointly with your Wife:

Most people opt to take a joint loan as it increases the loan amount eligibility. If husband and wife own a property, there is no issue relating to the succession. If you have taken a home loan along with your wife who is working then you both can claim separate deductions in your ITR. Both individually can claim up to a maximum of Rs.1,50,000 individually under Section 80C. The owners who have own the house and are occupying the house can individually claim for deduction on the account of interest that is paid on the amount that is borrowed. The place can be given out for rent and there is no restriction on the amount. The deductions can be claimed in the ratio of ownership. The tax benefits are as follows:

Interest paid on loan is eligible for deduction up to Rs.2 lakh under Section 24 when the property is self-occupied.
The principal amount repayment of up to Rs.1,50,000 is eligible for deduction under Section 80C.

The planning for tax benefits for the joint owners in done in such a way that all of the owners can avail the tax benefits and no part of the total repayment is going waste.

Disadvantages of taking a joint home loan:

If you decide to buy another house in the future, then one person will be termed as the owner and the other will be treated as let-out even if you aren’t paying rent. The second house will be deemed as rented out and you will have to pay the income tax on the rent received as per prevailing market rates.
You will be required to pay wealth tax on one of your houses as only one house is exempt from tax.

Scenario 4: If you have two Home Loans:

If you have multiple home loans, then you can avail tax benefits. But the benefits available towards principal repayment is limited to Rs.1,50,000. The interest paid on loan is eligible for deduction up to Rs.2 lakh under Section 24. There is no cap of Rs.2 lakh under Section 24 if the house is let-out. The interest then paid can be deducted from the Income from House Property under Section 23.

One of your property can be chosen as self-occupied and the other will be considered as let-out property.

Scenario 5: If you have borrowed from a Friend or from a Family Member:

In the event you have taken a loan from a friend or a family member, the repayment for the same won’t attract any deductions under Section 80C. You can however claim benefit for interest payment under Section 24. You will have to furnish a certificate that the interest is paid for the financial year. This certificate must come from the friend or your family member.

Scenario 6: If you are a first time Buyer and are taking a Loan for Residential House Property:

A new Section 80EE has been inserted for the Assessment Year 2014-2015 and 2015-2016. The purpose of this is to promote house ownership and creating jobs for the construction workers. The tax benefit is available only to first time buyers. The value of the house cannot be above Rs.40 lakh. The loan taken should not be more than Rs.25 lakh.

The first time buyer must take a loan from any financial institution or housing finance company. The loan should be sanctioned between 1^st April, 2013 and 31^st March, 2014.

The assessee can claim deduction up to Rs.1 lakh in the Assessment year 2014-2015. The deductions can be claimed in 2 assessment years. If in the AY 2014-2015, you haven’t claimed up to Rs.1 lakh, then you can claim the same in the 2015-2016 Assessment year.

Mr. Ram has taken a home loan and the interest he pays towards it is Rs.90,000 in the AY 2014-2015. He claims deduction for that amount in the AY 2014-2015. The balance of Rs.10,000 can be claimed in the AY 2015-2016.

Here the deduction is allowed to the individual taking the loan only. Spouse will not qualify for the relief under Section 80EE if property is purchased jointly. The house can be purchased for self-occupancy and with the intention of letting it out. Interest paid includes the service fee, other charges and processing fee charges that are incurring.

Conditions under which the Tax Benefits can be Reversed:

If you sell your house within 5 years from the end of the financial year that you got the possession of the house, the tax benefits can be reversed. It will be added to capital gains and you will be taxed accordingly.

Note: Tax benefit cannot be reversed for interest payment made under Section 24 of the IT Act.

Important Things that you must know about Tax Benefits on Home Loan:

The home loan borrowers are entitled to deductions and these deductions can be claimed by the property’s owner only.
If there is a co-owner the tax benefit limit applies to each co-owner.
If the co-owner is not a co-borrower, then he can’t avail any tax benefits.
Co-borrower who is not a co-owner also cannot avail tax benefits.
Each joint owner shares tax benefits in proportion to his or her share in the home loan. Therefore it is important to establish the share of each co-borrower.
In order to claim for tax benefits, you must provide the certificate that shows the split between the principal amount and the interest that is paid for in EMIs. This certificate is issued by the housing loan company.