Long term tax benefits of home loans

Introduction: When you buy a residential property with a loan, you can avail long term tax benefits under various sections of the Income Tax Act. Let’s take a look.

Mr. Arora stays in Chennai in a rented apartment. He wants to buy a property, but his EMI is working out to be much higher than his rent. While that would mean a higher monthly outgoing, Mr. Arora knows that it would be wise to invest in a property of his own. Should he buy his own home?

There are several tax benefits on home loans available which makes buying a home a financially sensible decision for people like Mr. Arora. Tax benefits on home loans are offered under several sections.

Deduction of principal repayment under section 80C

If you are paying a home loan, there are two components, the principal repayment and the interest payment.

We will look at home loan tax benefits under section 80C of the income tax act. The principal you pay towards a home loan qualifies for a deduction under section 80C. The maximum amount of deduction allowed Rs 1.5 lakh. There is however a stipulation attached to this section. The house should not be sold within five years after you possess it. In case the home is sold, the deductions claimed will be added back to your income.

Also, remember that the total limit of Rs 1.5 lakh under section 80C also includes other tax-saving investments like tax-saving fixed deposits, ELSS funds, PPF, and so on.

This tax deduction is allowed based on payment, irrespective of the year in which such payment has been made. It also includes the amount paid toward the stamp duty and registration fee.

Deduction paid for interest on home loan under section 24

Home loan tax benefits are also available under section 24. This section allows you to claim a deduction for a maximum of Rs 2 lakh per year for interest paid. This is for a self-occupied property. For let-out properties, there is no upper limit for claiming interest. Also remember that this deduction is available only if the construction is completed within five years of taking the loan. Otherwise you claim only up to Rs 30,000.

Also, unlike 80C, the tax deduction on interest payment under section 24 is deductible on a payable basis or accrual basis. Hence you can claim deduction under section 24 yearly even if no payment has been made during that year.

Additional deduction under section 80EEA

For those purchasing a home in the affordable category, an additional deduction of Rs 1.5 lakh is available for interest payment as announced in Budget 2019. This is over and above the deduction of Rs 2 lakh available under section 24. The total amount of deduction available will thus be Rs 3.5 lakh in a year. This would mean an overall benefit of Rs 7 lakh over 15 years.

However, there are certain conditions to avail deduction under section 80EEA.

This is applicable only if you are buying your first home. On the date the loan is sanctioned, the taxpayer should not be the owner of any residential house property. Also, benefits under section 80EEA are available only for affordable houses. The stamp duty of the house property should be Rs 45 lakh or less.

There are also certain conditions concerning the carpet area of the said house property. There is a mention of these in the memorandum to the finance bill. However, they are not specified in section 80EEA. The carpet area should not exceed 60 sq mt or 650 sq ft in major cities like Mumbai, Bengaluru, Delhi NCR, Hyderabad, Kolkata and Chennai. In other cities or town, the carpet area should not exceed 90 sq meter or 968 sq ft. Home loans taken until 31 March 2020 are eligible for this deduction.

The property needn’t be self-occupied a borrower can claim deduction even if he or she is living in rented accommodation. Also this deduction can be availed singly and jointly. Let us say that a person owns the home together with a spouse and both of them are paying interest for the loan. Both of them can claim this deduction as long as they fulfil the remaining conditions.

Deduction under section 80EE

Even before section 80EEA, there was a section 80EE. Under this, you can claim a deduction of Rs 50,000 over and above Rs 2 lakh limit under section 24. To claim this deduction you cannot own any other house property on the date of sanction of the loan. There are some conditions to be met to avail this deduction. The property value should be equal to or less than Rs 50 lakh. The amount of loan taken for the house should be Rs 35 lakh or less. However, if you are eligible for deduction under section 80EE you cannot avail the deduction under section 80EEA.

Deduction for interest paid on a home loan during pre-construction period

As we have seen the deduction on interest can only be claimed from the year in which the construction of the property is complete. However, if you have started paying EMIs, you can also claim your pre-construction interest as a deduction. It can be claimed in five equal instalments beginning from the year in which the house is purchased or the year in which the construction is complete.

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