Know Your Tax Benefits As A Homebuyer
Taxes are a necessary evil, say some. They confuse us, irk us, and sometimes drain us. But you can avail of multiple tax benefits if you are buying your first house. All it needs is proper knowledge and good financial planning. MakaanIQ explains how you can be a smart planner.
Tax benefits depend on a number of factors. Whether it is fully or under-constructed property, laws related to self-occupancy and renting, and principal and interest component of the home loan payment are some of these.
A home loan can be tax-efficient with a proper understanding of three major sections of the Income-Tax Act that cover tax gains under house property – 80C, 80 EE and 24B.
Section 80C: The amount paid as repayment of the principal amount of a home loan by an individual is allowed for tax deduction under this section. The maximum tax benefit allowed at present is Rs 1,50,000. It includes amounts invested in PPF account, tax-saving fixed deposits, equity-oriented mutual funds, National Savings Certificate, and Senior Citizens’ Saving Scheme. The tax benefit is allowed only after the construction has been completed and the completion certification received by the taxpayer.
The deduction for interest payment on the home loan, under this section, is allowed if the loan is sought for the extension and renovation of a house, but only after the construction is complete.
Section 24B: This section deals with tax benefits on interest paid by an individual on his home loan. The maximum tax benefit allowed for a self-occupied property is Rs 2 lakh. The home loan can be taken for construction, reconstruction, repair, renewal, or purchase of a residential property.
In case the property for which the home loan is sought is not self-occupied or rented out, no maximum limit has been prescribed and the whole loan interest can be claimed for deduction.
Besides, if the property is not constructed within five years (financial year 2016-17 onwards) from the end of the financial year in which the home loan was availed of, the interest benefit will be reduced from Rs 2 lakh to Rs 30,000.
Section 80 EE: This section covers income tax rebate on interest on home loan for ‘first-time buyers’, and provides an additional deduction of Rs 50,000 over and above the tax deduction of Rs 2 lakh under section 24 and Rs 1.5 lakh under section 80C. This can be availed of from financial year 2016-17 onwards. The home loan must have been sanctioned between April 1, 2016, and March 31, 2017, for one to be able to claim a deduction under this section. The deduction is allowed only if the value of the property purchased is less than Rs 50 lakh and the value of the loan sought is less than Rs 35 lakh. The benefit will be available till the time the home loan is repaid.
Demystifying tax benefits
What if you sell the property within five years of occupancy?
If the property is sold within five years of occupancy, the tax benefit availed of for the principal amount of the home loan payment will be reversed and treated as your income and added back to the salary. There will be no reversal for the interest amount paid.
What if you take a loan from your family and friends?
If the home loan is taken from family or friends and regular instalments are being paid, only the interest amount of the home loan payment will be allowed for deduction, not the principal amount. For claiming these deductions, one needs to furnish the documents provided by the lender clearly indicating the amount paid towards the interest and the principal.
What is the deduction available for an under-construction property for which the loan has been disbursed?
Banks offer loans under schemes where the loan amount gets disbursed and the lender starts charging the EMI, even as the construction of the building is under way. There is no difference between EMI and pre-EMI for taxation purposes. If the possession of the property has not been taken during the financial year, there will be no tax benefit. Tax deduction is available only if the under-construction property is completed during the financial year. For instance, loans that get disbursed under Advance Disbursement Facility scheme, there is no tax benefit during the years the property remains under construction.
My husband and I have taken a home loan jointly. Can we both claim income-tax deduction under house property separately?
Yes, both husband and wife can claim separate deductions in income-tax returns. The repayment of the principal amount of the loan can be claimed as a deduction under section 80C, up to a maximum of Rs 1.5 lakh individually by each co-owner.
Can I claim exemption for both home loan and HRA?
If you have taken a home loan and staying in a rented place, you are entitled to tax benefit under section 80C and 24B, as well as house rent allowance. And, if you have taken a home loan but have let out the house and are staying in a rented accommodation, you will be entitled to all the benefits mentioned above. However, in this case, the rent you receive will be taxable.
Is loan taken from friends and relatives liable for tax benefit?
Obtain interest certificate from your relative/friend to claim a tax deduction on interest component. However, in this case you cannot get the tax benefit for principal repayment. Also, ask the lender to show the interest paid by you in their internet returns filing.
Are there any tax benefits on missed EMI?
A homebuyer can claim the tax benefit on the interest component of the housing loan even if he has missed an EMI (equated monthly installment) payment. The payee should have the copy of interest certificate issued by the lender that specifies the loan amount and total interest payable in the financial year. However, the tax deduction on principal component won’t be functional here as it depends on the actual repayment.
With inputs from Parul Pandey & Surbhi Gupta