Income tax benefit on pre-payment of home loan
Tax Exemption

You have been frugal, saving money for a long time and plan to fully pre-pay your home loan to get rid of the EMI. A big shout out to you for achieving this milestone in life. However, you have been wondering about the tax implication of home loan pre-payment. Also, you are wondering if you can claim the pre-payment penalty as a tax deduction? Let us tell you about it. 

How can you claim a deduction of the principal amount on pre-payment?

Section 80C allows the deduction for the amount paid towards the principal repayment of the home loan taken from the specified financial institutions. This deduction is allowed under the overall umbrella limit of Rs.1.5 lakh of Section 80C. There is no threshold limit for claiming principal repayment of home loans; hence, any principal payment amount up to Rs.1.5 lakh, irrespective of whether it is pre-paid or not, can be claimed as a deduction under Section 80C. Any amount paid more than Rs.1.5 lakh cannot be claimed as a deduction, even in the case of pre-payment. 

The deduction under Section 80C for the principal repayment of the qualified housing loans is available along with varied other payments like Life Insurance premium, Equity Linked Savings Scheme (ELSS), National Savings Certificate (NSC), Public Provident Fund (PPF), tax savings fixed deposits, tuition fees for children, etc. 

Can you claim a deduction of pre-payment charges?

There have been many case laws in which the taxpayers have claimed the foreclosure charges under section 24(b) of the Income Tax Act. The higher authorities have passed the judgement in favour of the assessee, referring to the definition of the interest mentioned under section 2(28A) of the Income Tax Act. As per section 2(28A), “interest” means interest paid towards borrowed money. Further, it would also include any service fee or other charge incurred due to borrowing or towards any credit facility which has not been utilised. 

Hence, after the judgments, the taxpayers can claim the deduction of pre-payment charges and interest up to Rs.2 lakh limit for a self-occupied property (there is no threshold for letting out property. 

For any clarifications/feedback on the topic, please contact the writer at jyoti.arora@cleartax.in

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