Save at least ₹5 lakh with a home loan
PremiumPrincipal part of a home loan can be claimed under the overall deduction limit of ₹1.5 lakh in section 80C
Loans can make up a major part of your tax saving planning. One such category is housing loans that can help you save ₹5 lakh or more on taxes in a year. Principal part of a home loan can be claimed under the overall deduction limit of ₹1.5 lakh of section 80C, whereas the interest paid towards the loan is eligible for deduction of up to ₹2 lakh under section 24 for self-occupied properties and fully deductible for let-out properties.
An additional deduction of ₹1.5 lakh is available on interest repayment under section 80EEA for first time home buyers, but only for loans taken between 1 April 2019 and 31 March 2022 and where the stamp duty value of the property is ₹45 lakh or below.
Rules around tax breaks available on housing loans vary greatly for under-construction property, ready-to-move in house and land. Further, whether the loan being serviced is on a self-occupied or a let-out house can also affect the quantum of tax breaks you can claim.
“A property qualifies as self-occupied when the owner or his family actually lives in it and such property or part of it is not let out at any time during the year. If the property was vacant during the year owing to the owner’s work obligations at any other city and he has to reside in that city in a place not owned by him, it will still be considered self-occupied. Income tax laws allow two properties to be considered as self-occupied," said Suresh Surana, founder, RSM India.
View Full Image
Additionally, if you are repaying a home loan, on either let-out or self-occupied house, and also paying rent on a separate accommodation, you can claim House Rent Allowance (HRA) as well tax deductions on the loan together.
“Under the provisions of the Indian Income-Tax Act, claiming House Rent Allowance exemption towards rent payment and deductions available on a home loan are mutually exclusive. Hence, any taxpayer can claim these deductions provided their respective conditions are met," said Ritesh Kumar, Partner, IndusLaw.
Tax breaks as per type of property
Under-construction property: You cannot avail tax benefit on the principal repayment of a housing loan for the period during which the property is under construction.
“Such pre-construction principal components are not allowed under Section 80C," said Archit Gupta, founder and CEO, Clear.
The same applies to the interest part of the loan as well, but the difference is that you don’t lose out on the benefits completely, rather it is deferred until the construction is complete.
“Interest paid during the construction phase is termed as pre-construction period interest and it is allowed to be availed as deduction in five equal annual instalments starting from the year in which the construction is completed," said Surana.
This is subject to the annual deduction limit of ₹2 lakh under section 24.
“If the property is not constructed within 5 years from the end of the financial year in which the loan was taken, the pre-construction interest benefit in this case would be reduced from ₹ 2 lakh to ₹ 30,000 only," said Archit Gupta, founder and CEO, Clear.
MINT PREMIUM See All
Ready-to-move property: Deductions on both principal and interest are allowed on ready-to-move properties. In the case of tax benefit on principal repayment, if the property is sold within 5 years from the date of acquiring, the tax rebate is added back to your income and taxed. As for tax rebate on interest, section 24 allows up to ₹2 lakh deduction on self-occupied property.
In case of a lot out property, full interest paid towards a loan taken for a let-out property can be deducted. However, there is a limit for adjustment of loss on let out property as explained below.
Land: Loan taken to purchase a land does not qualify for any tax rebate. “Post construction of a residential house on such land (within five years from the year in which the loan was taken), deduction shall be allowed in a manner similar to an under-construction property," said Lokesh Shah, Partner, Saraf & Partners.
When servicing multiple loans
There is no restriction on the number of housing loans you can claim tax benefits on simultaneously, but the overall deduction is cumulatively capped at ₹1.5 lakh for principal and ₹2 lakh for interest paid on loan taken for self-occupied properties.
As mentioned earlier, there is no upper limit on the deduction you can claim on interest paid towards a loan or loans for let-out properties.
Gupta explained the reason for the difference in rules for tax deduction on interest for a self-occupied property and a let-out property.
“The income tax law does not require the taxpayer to include income from house property for up to two self-occupied properties, however, it allows a deduction for the interest paid on housing loans for such properties. The house property income becomes negative after claiming the home interest, which is shown as a loss under the head ‘Income from house property’. Such income which can be adjusted against any other head of income up to ₹2 lakh during the same financial year and excess loss can be carried forward to eight subsequent assessment years. However, in case of let-out property, the taxpayer is required to include rental income and then take the deduction of interest on housing loan from the said income. Hence, a limit for claiming deduction for interest paid on self-occupied property is placed to bring in parity with the income tax rules for the let-out property," Gupta said.
Never miss a story! Stay connected and informed with Mint. Download our App Now!!