Income tax benefits after availing a housing loan

To keep the housing sector of India afloat and keep the taxpayers encouraged for buying new homes, the Income-tax department has provided certain key benefits for those availing home loans. 

Tax benefits in the form of deductions are allowed against principal repayment & interest on the home loan, transfer charges, or any other charges incurred to purchase house property.

Let us take you through the key tax benefits available against home loan availed for purchase/construction of the house property. 

1. Deduction towards principal repayment of the home loan u/s 80C

An assessee is allowed a deduction for repayment of the principal component of the housing loan. The housing loan can be availed purchase of a new house or first-time construction of the house.  This deduction is available under the famous section 80C up to its limit of Rs 1.5 lakh only. 

However, this deduction will be reversed if the property on which deduction is claimed is sold within a lock-in period of five years from the date of purchase.

Also, any expenses incurred in respect to the stamp duty, registration charges or any other charges directly associated with the transfer of the property is allowed as a deduction under the overall limit of Rs 1.5 lakh of section 80C. This deduction is allowed only in the year of actual expenditure. 

2. Deduction of interest 0n borrowed loan for purchase/construction of a house property u/s 24

• Self-occupied property

Interest paid towards the housing loan is allowed as a deduction for both self-occupied and let-out property. However, there is a cap of deduction of Rs 2 lakh allowed for self-occupied residential property. This is also because the annual value of the self-occupied property is nil, and so any interest paid will give a house property loss. However, the deduction amount allowed is reduced to Rs 30,000 (i) if the construction of the new house property is not completed within five years from the end of the financial year in which the loan is borrowed, and (ii) In case of the loan availed is for reconstruction, repairs or renewals of the self-occupied residential property.  

• Let-out property

In respect to let out property, there is no cap limit, and so the entire interest value is allowed as deduction. Hence, actual interest incurred on loan availed for acquisition, construction, repairing, reconstruction shall be allowed as a deduction for let out property.

• Pre-construction period interest

Interest about the period before the year of acquisition/construction of the house property can be claimed as a deduction in five equal instalments. 

This deduction is allowed from the beginning of the year in which the property was first constructed.

The total deduction limit of Rs. 2 lakh shall apply for both pre & post construction period interest in case of self-occupied property.

In case of let out property, pre-construction interest can be claimed not more than the limits on set-off of loss arising from excess interest payments. As per set-off provisions, you are eligible to set off house property loss only to the extent of Rs 2 lakh in the current year against income under any head. The balance loss needs to be carried forward to the next eight years.

3. Additional deduction of Rs 50,000 u/s 80EE 

Section 80EEA was introduced from FY 2017-18 as an additional deduction up to Rs 50,000 for the interest payable on housing loan based on below conditions:

• The financial institution has sanctioned the loan during the financial year 2016-17.
• The amount of loan sanctioned is less than Rs 35 lakh.
• The value of the residential property does not exceed Rs 50 lakh.
• The assessee is the first time owner of the house property as on the date of sanction of loan.
• If any deduction is claimed under this section, no deduction shall be allowed of such interest under any other provision.

The interest deduction under section 80EE is available until the repayment of the loan if the conditions mentioned above are satisfied. The interest deduction continues to be available for an individual whose loan was sanctioned within the limits and conditions prescribed in section 80EE.

4. Additional interest deduction up to Rs 1.5 lakh under 80EEA

Section 80EEA has been further introduced from FY 2019-20 to extend and enhance the benefits allowed under Section 80EE for low-cost housing.

Additional deduction up to Rs 1,50,000 for interest payable on a home loan can be claimed subject to the following conditions:

• The assessee must be an individual.
• The loan is sanctioned by the financial institution or housing finance company between 1 April 2019 and 31 March 21 (one-year extension granted beyond the 31 March 2020 in Budget 2020).
• The value of the residential property does not exceed Rs 45 lakh.
• The assessee is the first time owner of the house property as on the date of sanction of loan.
• The individual should not be eligible to claim interest deduction under section 80EE.

It is important to note that deduction for interest payments under Section 80EE (Rs 50,000) and 80EEA (Rs 1.5 lakh) is in addition to the deduction of Rs 2 lakh available under Section 24.

To avail maximum benefit of these deductions, deductible limit of Rs 2 lakh under Section 24 should be exhausted first. Then one should go on to claim the additional benefits under Section 80EE/80EEA. 

Therefore, taxpayers can claim a total deduction of Rs 3.5 lakh for interest on the home loan, if they meet the above conditions of section 80EEA and Rs 2.5 lakh in case they meet conditions of earlier introduced section 80EE.

5. Interest deduction in case of joint owners

In case of joint ownership of the houses wherein the home loan is also sanctioned jointly, all the joint borrowers are eligible to claim the deduction u/s 24 for interest payment up to Rs 2 lakh and deduction under section 80EE/80EEA, as the case may be. Further, each joint owner can also claim deduction under section 80C for principal component repayment up to Rs 1.5 lakh in their tax return individually. 

The benefits of interest deduction and repayment of housing loan are available to both residents and non-residents Indians.

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