There can be numerous reasons to invest in a property; it may be used for residential purposes, to boost income through renting or as a long-term investment. The government of this country has also supported investing in property, primarily through tax benefits that one can avail by taking a home loan.
Current estimates show that mortgage penetration has breached the 10% mark for the first time in FY18. In other words, housing credit is currently estimated to be over 10% of India’s GDP. Income tax benefit on a home loan has, in fact, been a significant contributing factor behind this growth.
Explained: Tax benefits on home loans
There are two sections in the Income Tax Act, 1961 that primarily deal with tax saving on a home loan – 24, and 80C. These sections deal with interest deductions, principal deductions and additional interest for first-time home buyers.
To understand these deductions, one has to first understand how loan repayment works. When you pay the EMI every month, a part of it goes to pay the interest accrued, and the rest goes towards principal repayment. Since these are two separate components, the tax benefits apply to both separately and are governed by different sections.
The amount you pay as housing loan interest annually is exempted from your taxable income under section 24b of the IT Act. The maximum tax benefit that you can avail under this section is capped at Rs. 2 Lakh per year for self-occupied properties.
Since FY19, the number of houses on which you can claim this benefit has been raised to two. Earlier, if an individual had more than one property, only one was considered as self-occupied, and the others were treated as sublet.
There is no upper limit on the tax deductions if you have rented out the property.
There are some more crucial features of section 24b, which you should keep in mind:
The property has to be completed or acquired within five years of taking the loan. If this condition is not met, the deductible amount comes down to Rs. 30,000.
Tax on interest payment is deductible on accrual or payable basis compared to the payment basis for section 80C.
If it is a joint home loan, each applicant can claim the maximum tax deduction amount.
Section 80C of the IT Act deals with tax exemptions for principal repayments of housing loans. The maximum deductible amount under this section is Rs. 1.5 Lakh. Note that registration fee and stamp duty is also included in the deduction amount even for those who haven’t taken any loans.
There is one significant limitation that you should be aware of while claiming tax benefits under section 80C. It is only applicable after you have acquired a property. Under-construction properties are not eligible for these tax benefits.
You must also note that no tax benefits shall be extended if the assesse transfers ownership of the property to someone else within five years of availing the first tax benefit. The amount saved on tax deductions shall, instead, be added to his/her income to be taxed on the year of sale.
These are the tax exemptions and benefits every borrower should know. You can calculate your savings using one of the numerous home loan tax benefit calculators available online.