The dream of owning a house in India is no more a tough task when there are ample options to get a home loan. Indian Government is promoting housing in the country and there are target to ensure everyone own a house in the country in the next few decades. With this target Government has reduced the rate of interest on home loans, subsidies are offered for selected individuals and locations plus exemptions are offered. Yes, it is possible to save tax on the EMI payments made on your home loan. If you have taken a home loan in India then you are entitled to the deductions under Section 24, Section 80C and Section 80EE. The repayment of home loan is basically categorized into two segments and they are principal amount and interest on the home loan.
Tax Benefits available for Individuals with Home Loans
- Section 24:
The interest amount paid towards home loans are tax exempted under Section 24. Accrual basis is considered for tax deduction Rs.2 lakhs is the maximum tax exemption available under this Section. Individuals also have the option to claim tax benefits on yearly basis according to the loan repayment style. However, it is important to ensure the house construction is completed within 3 years of taking the home loan else the deduction under Section 24 will be only to the extent of Rs. 30,000. Loans taken for purpose other than owning a house does not get tax exemption under Section 24. Loans taken for renovation, repairs and reconstructions do not get the benefit of Section 24.
- Section 80C:
It is possible to enjoy tax benefit on home loans’ principal amounts under Section 80C. However, maximum tax allowed on the principal amount is Rs. 1, 50,000. Irrespective of which year the principal payment was made by the borrower, tax exemption is based on payment basis. If the individual has not paid any amount towards the principal of the loan amount for a year then tax exemption is not available for that particular year. Apart from the principal amount of the loan any payments made by the loan borrower towards registration fees and stamp duty is also tax exempted under Section 80C. Also even if you have not taken a home loan but have purchased a property, the registration fees and stamp duty is exempted from tax under this Section.
- Section 80EE:
If you are a first time home loan buyer then there are additional benefits available under Section 80EE. In order to enjoy this benefit, it is important that your loan was approved by the banks or NBFC between the period 1st April, 2013 and 31st March, 2014. Plus the home loan amount should not exceed more than Rs. 25 lakhs and the overall value of the residential property should be below Rs. 40 lakhs. For such borrowers, the deductions under Section 80EE are up to Rs. 1 Lakh. Government will also check if the property is self-used or rented out. And if you are the only owner of the property or if there are joint applicants. Based on these the tax exemption will alter.
Benefits Available for those who are repaying Home Loan through EMIs
Those who are repaying home loans through EMI options have more reasons to be happy. There is option to claim tax deductions on both the principal of the loan amount as well as the interest on the same. There is no doubt that huge EMI payments will be a burden unless you clear off home loans, but during that time such tax exemptions and deductions will definitely come to help and you will be able to save a pretty good amount of your income. Indian Government is trying to offer all these tax benefits for home loans to promote loans and to ensure everyone in the country has housing.
Deductions that can be claimed for Home Loans
- Tax deduction up to Rs.2 lakhs is available under Section 24.
- When you have possession of the house, tax deductions on the home loan interest can be enjoyed.
- Under Section 80C principal amount deductions can be enjoyed up to Rs. 150,000.
- Under Section 24 of the IT Act, prepayment charges on home loan, Processing fee for the sanctioned home loan and service fees are eligible for deductions.
- Under Section 80C, registration charges and stamp duty charges are eligible for deductions.
Requisites to Enjoy Deductions on Home Loan
- Until possession of the house, tax benefits cannot be enjoyed.
- Home loan should be taken for purchase of the house or for construction purpose only.
- If the house construction is not completed within 3 years of taking loan then deductions will be reduced to Rs. 30,000 only.
- Statements from the lender of home loan should be furnished to avail tax deductions for the payments made.
Eligibility for Tax Deductions if you have More than One Home Loan
Those who are lucky to own more than one home through home loan can also enjoy the above mentioned benefits of deductions. However, whether it one house property or more than one, the limit that the borrower can enjoy as deductions is fixed and it is the same. That is the deductions for borrowers of more than one home loan are under Section 80C principal amount deductions can be enjoyed up to Rs. 150,000. And Tax deduction up to Rs.2 lakhs is available under Section 24.
Under-construction House: How to Claim Tax Deduction on Home Loan Interest Payments
Interesting Facts of Home Loans Tax Saving
We know by now know that taking home loan is a smart way to save tax paid to the government. But here are some additional facts that most of you are unaware of. This information will help you in handling the home loan smartly to enjoy maximum tax benefits and to save until the maximum.
- If you sell your house within 5 years- tax benefit reversal is applied:
While you are enjoying all the tax deduction benefits, it is very important to keep in mind that these can be reversed if you sell your house within 5 years of either taking loan or 5 years of owning the property. Tax benefits availed on the principal amount will be reversed in order words mean- you will be charged tax to the annual taxable income up to the amount that was deducted. This will be reversed the year you sell the property. The tax reversal rule is applicable under the Section 80C of the IT act.
- Even if you missed an EMI, tax benefit on interest amount can be claimed:
Tax benefit on interest on home loan will work different from tax benefit on principal of home loan and property taxes. As the interest on home loans is on accrual basis, even if the EMI is missed for a month, interest deductions for the year can be enjoyed by the borrower. Under Section 24 the word “Payable and paid” is clearly defined and the interest calculation on accrual basis for deductions will come to help. Anytime tax authorities raise any question with regard to such deductions, make use of the claim receipts to justify and the offer appropriate reasoning for claiming tax deductions.
- Tax deduction is available for loan taken from relatives and friends towards housing requirement:
Under Section 24, the borrower can enjoy tax deductions on interest on home loan that is taken from relatives and friends. These loans can be used for either purchase of a house or for construction of a housing property. Money borrowed from individuals for renovation, reconstruction and repair of housing property can also make use of Section 24 to avail interest on loan benefits. For tax deduction purpose, it is not necessary that the loan should be from a bank, taking loans for housing purpose from individuals are also considered under Section 24 of the IT Act.
- Pre-construction period interest up to 5 years can be claimed under tax deduction:
Though it is not possible to claim tax deduction on the principal amount until possession of the property, borrowers have the right to claim tax deductions on the interest paid toward home loan even if you have not taken possession of the housing property. The installments you received from banks during construction will attract interest and such interest can be claimed under tax deductions. During the pre-construction period, deferred deductions on interest paid are available as per law.
Documents You would Need for Claiming a Tax Deduction
Here are some of the documents that should be submitted to avail tax deduction on your housing property:
- Property ownership details and documents such as sales deed, property clear titles documents and etc.
- Loan document certificate along with the split of interest and principal amount of the EMI payments made.
- Document proof for house construction completion.
- Documents to prove the date of purchase of the property (Registration documents.
- Only loan borrowers can enjoy tax benefits. Loan should be in his/ her name to enjoy benefits.
- Proof of paying municipal taxes of the year.