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Home loan tax benefit

Highlights

  • You can claim tax benefit on interest paid even if you missed an EMI.

  • You can claim pre-construction period interest for up to 5 years.

  • Loans from relatives and friends is eligible for tax deduction.

Homeloan Thursday, 13th April 2017   Editor: Ananya Gupta

The housing sector, which is one of the largest job creators in the economy, has seen the demand plunge after demonetization. There are high expectations from the Union Budget 2017 where higher tax benefits on home loans will boost realty demand. Buying your first house on a loan has multiple benefits.  These deductions will help reduce your tax outgo and manage your cash flows.
 

Here are all the deductions you can claim when you take a home loan:

1. Deduction on interest:  If you are paying EMIs for a home loan you took to buy a house, the interest component in the EMI can be claimed as deduction.  To claim tax benefits, you must be both owner and co- borrower. This deduction can be claimed starting the year in which the construction of the house is completed. Suppose the construction of your house was completed on September 20, 2013, you can claim deduction for interest for the entire 12 months in financial year 2013-14. The interest payments for the year shall result in a loss under the head 'income from house property' which can be adjusted against in the same year against other heads of income in your income tax return including salary. Therefore, it leads to reduction in your total taxable income and the tax you pay thereon. You can claim tax benefit on interest paid even if you missed an EMI.
 

2. Deduction on principal repayment:  The component which goes towards principal can be claimed under Section 80C of the Income Tax Act.  The maximum amount which can be claimed as deduction under Section 80C is Rs 1.5 Lakh. But if you sell your house within five years from the date of purchase, or, five years from the date of taking the home loan, the repayment tax benefit will get reversed and it will be added to your annual taxable income in the year in which the property is sold and you will be taxed at current rates.

 

3. Deduction on stamp duty and registration charges:  Payment made towards stamp duty and registration charges can also be claimed under Section 80C. However, these can only be claimed in the year in which these were paid.

 

4. Deduction on pre-construction interest:  Home loan benefits can be claimed once the construction of your house is complete and you receive its possession. You can claim the entire pre-construction interest in five equal installments. The total deduction, however, should not exceed Rs 2 lakh when the house is being used by you for your own residence.

 

5. Processing fee is tax deductible:  Most taxpayers are unaware that charges related to their loan are tax deductible. As per law, these charges are considered as interest and therefore can be claimed for deduction. There is a tribunal judgment which held that processing fee is covered under service fee as it is linked to services rendered by the bank in relation to loan granted .Therefore, it is eligible for deduction under Section 24 against income from house property.

 

6. Deduction on Loans from relatives and friends:  You can claim a deduction under Section 24 for interest repayment on loans taken from anyone provided the purpose of the loan is purchase or construction of a property. Deduction for money borrowed from individuals for reconstruction and repairs of property can also be claimed. “The taxpayer has to convince the officer about how the loan has been utilized for constructing or purchasing a house property and completion of construction was within five years. Remember, an income-tax return reporting the interest income has to be filed by the lender. "The interest charged should be reasonable and a legal certificate of interest should be provided by the lender along with name, address and PAN," says Gupta.This rule, however, is only applicable for interest repayment.  If you do not borrow from a scheduled bank or employer, you will lose all tax benefits for principal repayment.