Tax benefit on Home Loan under Income Tax Act, 1961

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Tax benefit on Home Loan under Income Tax Act 1961

For most people, owning a home is a dream comes true. The Indian government has traditionally favoured encouraging residents to invest in real estate. This is why a house loan qualifies for a Section 80C tax deduction. And when you buy a property with a home loan, you get a slew of tax breaks that cut your tax bill dramatically. Many programmes, such as the Pradhan Mantri Jan Dhan Yojana, are shining a bright light on the Indian housing market by attempting to address concerns of affordability and accessibility. 

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Key Abstract

According to the requirements of the Income Tax Act, 1961, taking out a housing loan might help you save tax. Even more so following the declarations made during the most recent fiscal budget. In her budget statement, Union Finance Minister Nirmala Sitharaman suggested extending the deadline for claiming extra deductions on house loan interest payments until March 31, 2024. This comes after the administration extended the deadline in the previous budget to March 31, 2022. All home loans sanctioned before March 31, 2022 are eligible for the extension until March 31, 2024. 

While a housing loan might assist you in purchasing a home, it can also be an expensive endeavour. However, the multiple tax advantages that come with such a loan help you save money year after year. Examine how you may make the most of these advantages.

Many programmes, such as the Pradhan Mantri Jan Dhan Yojana, are shining a bright light on the Indian housing market by attempting to address concerns of affordability and accessibility. This post will go through all of the home loan tax breaks.

If you are confused about, how to avail tax benefits on your home loan as Income Tax Act. Then kindly connect to our experts on Legal Window.

Deduction for interest paid on housing loan

A home loan is required for the purchase or building of a home. If it is used for home improvement, it must be completed within five years of the end of the fiscal year in which the loan was obtained.

If you pay an EMI for a home loan, it comprises two components:

  • Payment of interest
  • Repayment of principal

Section 24 allows you to deduct the interest part of your EMI payments for the year up to a maximum of Rs 2 lakh from your total income. The maximum deduction for interest paid on self-occupied residential property is Rs 2 lakh beginning with the tax year 2018-19.

There is no upper limit for claiming interest on rented property. However, the total loss that may be claimed under the heading ‘House Property’ is limited to Rs 2 lakh. This deduction is available beginning with the year in which the house is constructed.

Deduction on interest paid towards home loan during the pre-construction period

Assume you purchased an under-construction property but have yet to move in. However, you are paying the EMIs. In this situation, your ability to deduct interest on a house loan begins only once construction is completed, or immediately if you purchase a completely constructed property.

So, does this imply you won’t get any tax breaks on the interest you pay between the time you borrow the money and the time you finish building? No.

Let’s look at why.

The Income Tax Act allows for a deduction for such interest, known as pre-construction interest. Over and above the deduction you are ordinarily able to claim from your house property income, a deduction in five equal instalments beginning with the year the property is bought or construction is finished is permitted. However, the maximum eligible amount remains at Rs 2 lakh.

For example, suppose you have a home loan for construction and pay Rs 10,000 in interest each month. After two years of construction, the house was finished in 2019. As a result, you can begin collecting the pre-construction interest of Rs 2.4 lakh (roughly) only once the building is completed in five equal payments beginning in 2019. Section 24(b) limits the maximum interest deduction to Rs 2 lakh (including current year interest and pre-construction interest).

However, if your house loan is qualified for Section 80EEA deduction, you can claim an extra Rs 1.5 lakh deduction. Section 80EEA is covered in more detail later in this text.

Principal Repayment Deduction

Section 80C allows a deduction for the principal component of the EMI paid for the year. The total sum that may be claimed is Rs 1.5 lakh. However, in order to claim this deduction, the residence must not be sold within five years of occupancy. Otherwise, the previous deduction will be applied back to your income in the year of sale.

Deducted in Stamp Duty and Registration Fees 

In addition to the deduction for debt repayment, a deduction for stamp duty and registration expenses can be claimed under Section 80C, but only up to Rs 1.5 lakh.

However, it may only be claimed in the year in which the expenditures are spent.

Extra deduction under Section 80EE

Home purchasers are eligible for an additional deduction of up to Rs 50,000 under Section 80EE. The following requirements must be completed in order to claim this deduction:

  • The loan amount should be Rs 35 lakh or less, and the property value should not be more than Rs 50 lakh.
  • The loan must have been approved between April 1, 2016 and March 31, 2017.
  • And, as of the date of loan approval, the individual does not own any other homes, indicating that he or she is a first-time home buyer.

Section 80EE was restored, although it is only applicable to loans approved before March 31, 2017.

Section 80EEA Additional Deduction

Budget 2019 has proposed an extra deduction under Section 80EEA for homebuyers of up to Rs 1, 50,000 to stimulate the housing industry.

The following requirements must be completed in order to claim this deduction:

  • The property’s stamp value does not exceed Rs 45 lakh.
  • The loan must have been approved between April 1, 2019 and March 31, 2022. (extended from 31 March 2021)
  • The individual does not own any other residence on the day of loan sanction, indicating that he or she is a first-time home buyer.
  • If the individual claims deduction under this provision, he or she should not be entitled to claim deduction under Section 80EE.

Deduction for a shared Home Loan

If the loan is obtained jointly, each loan holder can deduct home loan interest up to Rs 2 lakh and principal payments up to Rs 1.5 lakh under Section 80C in their tax returns.

To be eligible for this deduction, they must also be co-owners of the property lent. As a result, taking out a loan with your family can help you claim a higher tax benefit.

Deductions Section Maximum Deduction (INR) Conditions
Principal 80c 1.5 Lakh Houses should not be sold within five years of occupancy.
Interest 24b 2 Lakh The loan must be used to purchase/build a residential home, and it must be finished within 5 years after the end of the fiscal year in which the loan was received.
Interest 80EE Rs.50,000 The loan amount should be Rs 35 lakh or less, and the property value should not be more than Rs 50 lakh.
Stamp Duty 80C 1.5 Lakh It may only be claimed in the year in which the costs are incurred.
Interest 80EEA 1.5 Lakh The property’s stamp value should be Rs.45 lakh or less. Section 80EE deductions are not available to the taxpayer.

 ITR Filing for Individuals Starting from ₹ 500/

Conclusion

If you take out a second house loan to buy another property, you can enjoy the same tax benefits, but the total amount of deductions is subject to the relevant restrictions. The Government has introduced further incentives for investing in real estate in the 2019 Union Budget. Previously, only one property could be considered self-occupied, and a second house was thought to be rented out, and therefore notional rent was computed and taxed as income. However, a second home can now be deemed a self-occupied property.

Although a house loan has a financial cost, utilising your loan wisely may significantly reduce your financial burden and help you maximise your tax savings.

CA Pulkit Goyal, is a fellow member of the Institute of Chartered Accountants of India (ICAI) having 10 years of experience in the profession of Chartered Accountancy and thorough understanding of the corporate as well as non-corporate entities taxation system. His core area of practice is foreign company taxation which has given him an edge in analytical thinking & executing assignments with a unique perspective. He has worked as a consultant with professionally managed corporates. He has experience of writing in different areas and keep at pace with the latest changes and analyze the different implications of various provisions of the act.

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