Structuring Home Loans & Tax Exemptions

When taking a home loan either through a bank or a financial institution, it is imperative to understand the home loan tax exemption structure thoroughly. Procuring and creating your own home is a dream in itself, but with it comes the perils of financing. The Government of India has set up varied schemes under The Income Tax Act 1961 to encourage citizens to purchase homes while offering them tax exemptions. Instead of putting in all your savings into buying the house, it is advantageous to utilise the funds secured from a home loan. It is because you can make the most of multiple tax benefits, exemptions and returns through the various offerings.

Here are a few means on how to claim home loan tax exemption. 

• Tax Exemption for Interest Paid on Home Loan for purchase or construction of the house. 

 With Section 24 of the Income Tax Act 1961, you can claim tax exemption up to INR 2 lacs for the interest payable on the home loan obtained by you for purchase of ready property or under-construction property. The income from house property shall decrease by the amount of interest paid on a loan that is taken for acquisition, construction, repair, renewal and reconstruction of the property. Interest on home loan tax exemption is allowed to a maximum limit of INR 2 lacs. In the case of the property not self-occupied, there is no stipulation for the maximum limit, and the taxpayer can take the tax benefit for the whole interest amount under Section 24. Do note that when you utilise the tax exemption of interest feature under Section 24, it is deductible on a payable basis only. It means that on an accrual basis. Thus, the claim can be made yearly, even if no payment has been made during that year. If the property is not completed within five years of the loan sanction date, the tax exemption for interest is reduced from INR 2 lacs to INR 30,000 only. 

• Tax Treatment for Pre-Construction Interest

The home loan tax exemption limit for interest payable on a property under construction is stipulated under Section 24. However, the building should be completed within five years. Individuals purchase properties with a home loan even before the conclusion of the construction and begin paying the EMIs to the bank. In this case, don’t forget to read the fine print of Section 24, that clearly states Tax Deduction for payments of interest shall not be allowed before the completion of the construction. A few pointers to keep in mind: 

• If you take a home loan for repair, reconstruction or renewal. No tax exemptions are permissible for the interest paid before the completion. 
• If you take a home loan for purchase or construction of a property, you can aggregate the interest amount that has been paid before completion of the project. The combined amount is allowed for home loan tax exemption in five equal instalments for five consecutive financial years starting from the fiscal year of the completion of construction. 

• Tax Exemption for Principal Repayment

The principal or repayment amount of the home loan that is payable by an individual and is allowed under Section 80 C of the home loan tax exemption rules is up to a maximum of INR 1.50 lacs. The tax exemption under Section 80 C of The Income Tax Act is permissible on payment basis regardless of the year for which the payments have been made. Additionally, the amount paid as stamp duty and registration fees are allowed as tax exemption under Section 80C. The tax benefit under this section is only for property entirely constructed. If a property is under construction and you intend to purchase it. Firstly, the tax exemption is not permissible. Secondly, GST is levied on under-construction properties. To make the most of this tax exemption benefit, hold onto the property for a tenure of minimum five years. 

• Tax Exemption for First Time Buyers 

During the 2019 budget, a new deduction of INR 1.5 lacs under Section 80EEA was introduced for the interest paid on the home loan. It is part of the Governments initiative to making housing affordable and enables the home buyer to have a low cost of funds available at their disposal. It is possible to claim this tax exemption from Financial Year 2019-2020 onwards. It is over and above the tax exemption of INR 2 lacs under Section 24 and INR 1.5 lacs under Section 80C. However, there are a few stipulations to follow:

• The loan is to be sanctioned by a financial institution from 1st April 2019 to 31st March 2020. 
• The stamp duty value of the property should not exceed INR 45 lacs. 
• The borrower does not own any other property on the date of sanction of the home loan.

The next time you intend to obtain a home loan, you can structure your tax exemption with a tax saving calculator and with the aid of the various sections of the Income Tax act to benefit from the home loan tax exemption limit the maximum.

Related Articles:

• Know how housing finance can help you with Tax Planning
• Home Loans Can Help You Save Tax, Here’s How!
• How To Claim Benefits On Joint Home Loans?

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