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Claiming tax benefits from home loans

Claiming tax benefits from home loans
 

When you take a home loan, you can claim tax benefits under different sections of the Income Tax act. We discuss how to claim tax benefit on home loan.

Rajat stays in Chennai, and he recently bought a house under a home loan. Rajat falls under a high-income bracket and knows that a home loan comes with several tax benefits. So he goes to his CA and asks – how do I claim tax benefit on home loan? His CA tells him that he can claim tax benefit on home loans in various ways.

Let us look at the different sections under which one can claim tax benefits on home loan. Here, we will answer your question, how do I claim tax benefit under a home loan? The EMIs you pay on a home loan has both a principal and an interest component.

Section 80C:  We will now see how to claim tax benefit on home loan under section 80C. Section 80C offers a deduction on the total interest paid during a financial year. The maximum permissible amount of deduction available is Rs 1.5 lakh. However, this limit includes other payments and investments too. Also, to avail deduction under section 80C, you cannot sell the property within five years of possession. In that case, the deduction is reversed.

Section 24: Here is how to claim tax deduction under home loan under section 24. Under this section, you can claim deduction on the interest paid towards your home loan in a financial year. If the house is self-occupied, the maximum amount you can claim as interest is Rs 2 lakh in a financial year. If the property is let out, you can claim the entire interest as deduction without any maximum limit.

Section 80EE and Section 80EEA: Both these sections apply only to the first time home buyer. Section 80EE offers an additional deduction of Rs 50,000 on interest paid, over and above Rs 2 lakh. Section 80EEA introduced in the last budget allows for an additional deduction of Rs 1.5 lakh on interest paid, over and above Rs 2 lakh. However, section 80EEA is only applicable to affordable housing. To avail this deduction, the stamp duty of the value of the property should be Rs 45 lakh or less. Further, the carpet area of the property should not exceed 60 sq mt ( 654 sq ft) for major metros and 90 sq mt ( 968 sq ft) for other towns and cities. However, someone who is eligible for deductions under section 80EE does not qualify for section 80EEA.

Now, let’s look at how to can claim tax benefit for a home loan depending on different situations.

When the house is self-occupied: Here, you can claim a maximum deduction of Rs 1.5 lakh under section 80C on the principal amount in a financial year. The interest paid can be claimed up to Rs 2 lakh per annum.

When the house is let out: When the home is let out, the amount of deduction you can claim on the principal amount has the same upper limit of Rs 1.5 lakh. However, you can claim the entire interest paid as a deduction, without any upper limit. So

When you are a first time home buyer: If you do not own any property when you are applying for the home loan, you can use section 80EE and section 80EEA for claiming tax benefit home loan. However, you need to fulfil the given conditions.

When you have two home loans: If you have two home loans, claiming tax benefit on home loan is slightly different. The deduction you can claim on the principal repayment is capped at Rs 1.5 lakh for both home loans. However, in case of claiming the deduction on the interest paid, several different situations may arise. As we have seen, one can claim interest as a deduction up to a maximum limit of Rs 2 lakh for self-occupied properties. For let out properties, the entire interest can be claimed as a deduction, without any upper limit. Earlier, if you had two home loans, the second home was deemed let out, so one could claim the entire interest as deduction without any upper limit.

Under the provisions of the latest budget claiming tax benefit on home loan interest has changed. If someone has two homes, both are considered as self-occupied. So, if the second home is vacant, the deduction on interest you can claim on both the home loans is a maximum of Rs 2 lakh. However, if the second home is let out, you have to include it in your income, and you can claim the entire interest paid as deduction.

When you have taken a joint home loan: Claiming tax benefit for a home loan is more beneficial in this case. A joint home loan needs to be taken with a co-owner who needs to be a co-applicant. Here each of the co-applicants can claim deduction under section 80C up to Rs 1.5 lakh for the principal amount repaid. When it comes to interest repayment, each applicant can claim a deduction of up to Rs 2 lakh if the property is self-occupied. If the property is let out, there is no maximum limit.

When construction is not yet complete: You can also claim deduction on interest even if the property is under construction. The deduction is allowed in 5 equal instalments beginning from the year in which the property construction is complete or when you move in.

How to claim the deduction: We have seen how to claim tax benefit for home loan. To claim tax benefits on a home loan, certain documents are required. This would include ownership details and the loan document certificate that provides information on the principal and interest component. Other documents include ones which show the completion of construction, other loan documents and proof of municipal taxes paid. The tax deductions you are claiming needs to be mentioned in relevant sections of the ITR form.

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