Which Home Loan Is Not Eligible for Deduction Under 80C?

Many people take private loans from their friends and relatives to fulfil their short term and long term financial needs. People also buy homes by borrowing money on interest from friends and relatives. These individuals take loans from private sources for various reasons like flexibility in repayment, nil or minimum collateral requirement, no hassle of documentation and lengthy formalities, etc. 

The home loan taken from a financial institution can help you save tax. In contrast, no such tax benefits are available if the loan is availed from private sources.

Section 80C of the Income Tax Act allows claiming a deduction for the principal repayment of the house loan. However, only a loan taken from a financial institution can be claimed as a deduction. Any loan from private sources like friends and relatives is not covered under Section 80C. 

Under this section, a deduction of up to Rs 1.5 lakh can be claimed for principal repayment of a home loan availed for purchasing or constructing a new house. This is a common threshold limit for deduction for various expenditures and investments like premium for Life Insurance Policy, Public Provident Fund (PPF), Employees’ Provident Fund (EPF), Equity Linked Savings Scheme (ELSS), etc.

To claim a deduction for the principal amount of home loan, the taxpayer should ensure that the loan is availed by the entities or persons specified under Section 80C(2)(xviii)(c), like : 

  • From private or public sector banks 
  • Co-operative banks 
  • Notified conventions like housing finance companies. For example, LIC Housing Finance.
  • National Housing Bank as notified by the government.
  • Individual’s employer where such employer is a public company or a public sector company, university, co-operative society or any government undertaking

Home loans only from the sources mentioned above are eligible for deduction. Any loan from a private source will not be allowed as a deduction under Section 80C. 

Also, the interest deduction for loans availed from private sources will not be allowed under Section 80EEA. Section 80EEA allows a deduction for interest paid on a home loan up to Rs.1.5 lakh if a house is purchased under the affordable housing scheme as mentioned in the act.  

However, it should be noted that interest paid on the private loans for the purchase or construction of the house is allowed for deduction under Section 24. 

Hence, if a taxpayer avails loan from a private source, then only interest deduction up to Rs.2 lakh is allowed under Section 24 

Let’s understand this with an illustration.

Suppose Mr Rahul purchased a house worth Rs.20 lakh. He took a loan from his friend, Mr Rajeev. The loan is to be repaid in 20 equal instalments with an interest of Rs 10% yearly. He repays Rs.1 lakh principal and Rs.2 lakh interest for 2020-21.

Deductions for Mr Rahul

  • Mr Rahul can claim a deduction of Rs.2 lakh under Section 24 for interest paid on the home loan is taken from his friend. 
  • However, he cannot claim any deduction under Section 80C for the principal repayment because such a loan from a friend is not eligible under Section 80C. 
  • Also, he won’t be able to claim additional interest deductions under Section 80EEA. 

In the case of joint ownership, all the co-owners can claim the deduction. However, it is a must for an individual to be a co-owner and a co-borrower to claim the tax benefits. Just being a co-owners or just being a co-borrower will disqualify an individual for claiming the tax benefits.

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

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