A home loan is the only choice for any middle class family when it comes to realizing the dream of buying a house. This I realize when I took one. At that time I use to work with a bank and apart from drawing a salary there was no source of income. Some rise in disposable income and lower interest rates during that period made the decision easier. But even individuals with all sources available utilize home loan to avoid pooling their entire capital.
One of the major advantages of availing a home loan is the tax deduction available which reduces ones tax liability. Under Sec 24 (b) of income tax act you can claim repayment on the interest amount upto Rs 1.5 lakh annually while Under Sec 80C principal repayment can be claimed up to Rs 1 lakh. The exemption on interest repayment is without any limit when you avail it for a second house and so on. However, there are many conditions attached when you look at these exemptions in detail. Some of them even may disallow you the tax benefit if not fulfilled.
Let’s look at what the taxman says about availing a tax deduction on a home loan and some more benefits:
If you have bought any plot or land through a loan from a financial institution then the exemption of this section is not available. This section applies to only property acquired or constructed.
This is the most neglected aspect and many individuals try to claim home loan benefit taken on a property where complete ownership is of father, mother or any other family member. As per income tax act you can claim home loan exemption only when you have a complete or part ownership in property. However, exemption is allowed in case property is in the name of spouse only provided you can prove that it’s not for only tax exemption.
- Joint Loan
If you have bought a property through joint home loan then each individual can claim exemption in ratio of the loan contribution. Here most people make mistakes of purchasing property in one individual name through joint loan assuming the others can claim exemption too. This is not true and all joint loan borrowers can claim their share only if each has ownership in property.
- EMI Repayment:
Mode of EMI repayment is essential for claiming income tax benefit in your home loan. The Repayment should happen from the borrower account and not from any other family member. Also, in joint loans care has to be taken who is repaying the EMIs. Most mistakes happens here when claim is availed by spouse even when EMI payments are made from others members account. Even transferring of money from one member account to other member account is not allowed for claiming the exemption. So one need to draw a plan of dividing the EMI repayment if there is a joint loan.
- Let out Property
If you have a property which is let out then you can claim the actual interest you are repaying for your home loan. The rent you receive will be added to your income and taxed under “Income from house property”. Even here also you avail a standard deduction of 30%.
- More than one house
If you have bought more than one house then one is treated as self-occupied and other as rented. In this case there is no limit on the interest exemption you can claim for second, third and so on.
- Selling of Property
Many individuals who buy property with home loan sell it when they see a higher appreciation leaving them enough even after repaying the loan. Although there is a condition attached for reversing the tax benefit if sold within five years of purchase, it pertains to section 80C if claimed. Any benefit availed through interest deduction prior to this does not get reversed.
- Extending the Loan
At times your bank gives you call for availing a top up loan for house renovation or any other changes you want to make. If it’s a self-occupied property then you can claim tax deduction even on the interest repayment of this amount but only up to Rs 30000 p.a. However, if it’s a rented house or second house then you can claim the interest deduction without any limit.
- Loan from Friends or Relatives
Yes you can claim Under Section 24 interest repayment of a home loan you have taken from friends, relatives or family members provided you maintain proper records.
- Pre- Construction Loan Repayment
The interest component in the pre-construction period is also deductible from your income but only after the possession of the house. However, this can be claim only in five equal installments and every installment will fall under the annual limit of Rs 1.5 lakh.
- HRA Benefit
You can claim HRA benefit even when you have a property bought through a home loan. However, the benefit is available only when you are staying in rented accommodation and the property is not self-occupied.
A Home loan is, at times, a life time decision. The tax benefit you avail is similar to adjusting your EMIs deduction from your savings. Any mistake on this can deprive you from the benefit thus bringing your finances in unmanageable limits. Its wiser to make yourself aware and discuss with your tax consultant so that you enjoy the living in your dream house.