Most of us are aware of the tax deductions available for home loan principal and interest payments. However, tax laws for fully-constructed, under-construction, self-occupied and let-out apartments differ from each other. Knowing the nitty-gritty of these tax laws can help you claim all the deductions you stand to be eligible for. Here’s a closer look:
Home Loan Principal Repayment
According to Section 24 and Section 80C of the IT Act 1961, individuals availing home loans can claim tax exemptions on principal as well as interest payments.
Home loan principal payments enjoy tax deduction up to Rs.1.5 lakhs under Section 80C of the Income Tax Act, 1961. However, this deduction is only available after the apartment’s construction is complete, not before that. Therefore in case of a apartment under construction. This home loan tax benefit may be delayed.
Registration fees and stamp duty qualify for deduction under Section 80C. However, these tax benefits can be availed only in the year when that payment is made. Processing fees for the sanctioned loan, service fees or prepayment charges are eligible for deduction under Section 24 of the Income Tax Act.
If an individual sells the house within five years of taking possession or completion of construction, the deductions claimed on the principal payments are reversed.. This deducted amount of the previous years is treated as the individual’s income in the year of property sale and is taxed accordingly.
Home Loan Interest payment
- Self-occupied apartment
Ready to Move in: If you take a home loan to purchase an already built apartment and you live there, the paid interest on the home loan qualifies for tax deduction up to Rs, 2 lakhs under Section 24.This is in addition to the Rs.1.5 Lakhs granted as tax exemption under section 80C.
Under construction: For apartments under construction, the tax deduction under section 24 becomes available only after the construction is completed. The apartment’s construction should be complete within three years from the end of the financial year in which the home loan is disbursed, otherwise this tax rebate benefit gets considerably reduced.
During the construction phase, the total interest paid keeps accumulating, and this is divided into five equal installments starting from the year when the property was constructed. Five years after possession, this can be used to claim the necessary tax deduction. So if the total interest paid during the construction phase amounts to Rs 5 Lakhs, every year you may claim Rs. 1 lakh as deduction for the next five years. Simply put, interest paid on home loans in the pre-construction phase can be availed for deduction in five equal installments.
In the unfortunate event that the apartment’s construction is not completed or the possession is not taken within the three years period, the tax benefit towards the interest payment under Section 24 decreases substantially to Rs. 30,000 per financial year.
- Not self-occupied apartment
For an apartment that is not self-occupied, the total interest paid can be claimed for tax deduction. However, while filing your tax returns, you need to show the rent earned as income from house property. To compute the exact taxable amount, deduct municipal taxes from the rental income, then deduct 30% towards repair and maintenance charges from this value. Let’s illustrate this with an example:
Supposed your income from property is Rs. 1,50,000 during the year.
From that, you can deduct Rs. 30,000 in lieu of municipal taxes.
Then further deduct 30% towards repair and maintenance of the property = Rs.36,000
Thus, the taxable component of your rented out apartment amounts to Rs. 84,000.1,50,000-30,000-36000)
If you have a second apartment and it is unoccupied, it is still considered to have been rented out. In such as case, a notional rent income is computed based on prevailing market rates, which becomes taxable after making the 30% deduction towards maintenance and repair.
Unoccupied apartment due to employment in another city
If you do not live in your own apartment because you are employed in another city, the deduction limit on the interest paid is still fixed at Rs. 2 lakhs per annum. However, you can claim deduction on the house rent allowance (HRA) component in your salary of up to Rs. 60,000 per annum under Section 80 GG as per the new 2016-2017 budget.
Announcements in the Union Budget 2016-17
- Additional tax relief of Rs. 50,000 per annum is provided on a home loan of Rs. 35 lakhs for first-time homebuyers, provided the cost of the house does not exceed Rs 50 lakhs.
- Ceiling of tax rebate under 87A has been raised from Rs. 2,000 to Rs. 5,000, giving individuals with income not exceeding Rs. 5 lakhs, an additional tax relief of Rs. 3,000.
Tax implications for under-construction properties
Taking a home loan for an under construction flat is beneficial, but a fixed time frame is imposed. If you are availing a home loan here, you may defer the deduction of the interest paid till the time the construction has been completed.
Loan disbursement is different for under-construction apartments, and deductions can be claimed based on it. The key reason to go for an apartment under construction is because they are cheaper than ready-to-move apartments.
Tax benefits on multiple home loans
Tax benefits can be availed even in case of more than one home loan. However, the total benefit towards repayment of the principal remains limited to Rs. 1.5 lakhs and this limit does not change based on the number of outstanding home loans you have.
The tax benefit on interest payments towards a self-occupied property remains capped at Rs. 2lakhs. For property/properties that have been rented out, there are no restrictions and the full interest paid can be deducted from the income obtained from house.
What does not qualify
All the above-mentioned tax benefits are only for loans taken for purchase or construction of a house. Loans taken towards repair, renewal or reconstruction, do not carry any tax benefit related to the original home loan principal.