Tax Benefits on Home Loan in India

Housing Loan & Income Tax Benefits

Are you Planning to buy a new house on this Diwali but running out of money? It would be wise to go for home loan even you have enough money because it help you save tax, while you prepare to invest in a fixed asset. Acquiring a home loan makes you eligible for tax rebates under Section 80C and Section 24 of the Income tax regulations.

What is Home loan?

Basically home loan or the mortgage is just a funding for your new house. Banks disburse loan to the owner of the house with some criteria. Home loan is composed of two parts.

  1. Principal Payment (deductible u/s 80C read with section 80CCE)
  2. Interest. (deductible u/s 24)

Banks disburse full amount of loan by way of cheque in the name of Builder after calculating home loan eligibility criteria or any concerned party. That amount assessee has to repay every month by way EMI’s i.e. Equated Monthly Installments.

How Principal Repayment towards Home Loan helps to reduce Tax Liability?

Section 80C of Income Tax provides that an assessee, investing in any of the avenues prescribed in the section,is eligible for the deduction of a maximum amount of Rs. 1,00,000. It includes principal repayment of home loan, investment in PPF, PF, LIC, ELSS and such instruments.

Conditions for claiming deduction under 80C read with section 80CCE:

  1. This principle repayment is a direct deduction from your total income for that assessment year up to Rs. 1,00,000.
  2. If assessee already invested in other avenues like PPF or etc then the sum total should not exceed Rs.1,00,000.
  3. Principal repayment considered for deduction only if the loan is taken for self occupied house. Deduction in respect of principal repayment can be availed if the loan is taken for the house which is not self occupied and assessee staying in different city due to work

Explaining Section 24 of Income Tax Act and Deduction under this Section

  • Where the property has been acquired, constructed, repaired , renewed with borrowed capital, the amount of interest payable on such capital is allowed as deduction under Section 24 of Income Tax Act
  • The amount of interest payable yearly should be calculated separately and claimed as a deduction every year. So it is immaterial whether the interest is actually paid or not paid during the year.
  • Penal interest on housing loan shall not be allowed as deduction.
  • If the purchase price of the property is paid in installments with interest, the interest portion of the installment is an allowable deduction under Section 24.
  • If the fresh loan has been raised to repay the original loan and the new loan has been used only for the purpose of repaying the original loan then the interest paid on such fresh loan is also allowed as deduction.
  • Limit Prescribed u/s 24 is applicable to your self-occupied house only, for the other property, you can claim actual interest repaid, there is no limit for the same.

Tax Benefit of Home Loan in India

Interest on Loan taken from Friends and Relatives

Interest payment to friends and relatives can be claimed u/s 24 but only against a certificate received from them. In the absence of the certificate, you would not be eligible for the deduction. The recipient of interest income who issues the certificate is liable to pay tax on the interest income that he receives. As far as the principal payments are concerned, they would not qualify for tax benefit as loans only from notified institutions and banks are eligible for such deductions.

Interest attributable to the period prior to completion of construction:

In some cases it may happen loan is taken earlier and acquisition or completion of construction takes place in later year. So there is interest payable during the period of loan taken and completion of construction or actual acquisition, in such cases interest paid or payable for the period prior to the previous year in which the property is acquired or constructed will be aggregated and allowed in five successive financial years starting from the year in which the acquisition or construction is completed.

For example: Mr A took loan of Rs.10,00,000 on 01-04-2010 from a bank for the construction of a house on piece of a land he owns in Mumbai. The loan carries an interest @10% pa. The construction is completed on 15-06-2012. The entire loan is still outstanding.

In this case interest allowable for deduction for A.Y.2013-14 will be

  1. Interest for the P.Y.2012-13 on Rs.10,00,000 @ 10% is 1,00,000
  2. Interest for the pre-construction period i.e. from 01-04-2010 to 31-03-2012 (1/5th of Rs.2,00,000) i.e. Rs.  40,000

Total interest allowable is Rs.1,40,000

Ceiling on the amount of interest allowable Under Section 24 of Income Tax Act

  1. If the property is acquired or constructed with the capital borrowed on or after 01-04-1999 and such acquisition or construction is completed within 3 years of the end of the financial year in which capital was borrowed then the actual interest payable is allowed as deduction subject to maximum Rs. 1,50,000.
  2. In any other case interest up to maximum Rs.30,000 is deductible.
  3. This ceiling of Rs.1,50,000/30,000 is only in case the property is self occupied but there is no limit on deduction of interest if the property is let out.

Claiming Income Tax Benefits on Home Loan and HRA benefits together

  • If assessee has taken loan for the purchase of home in which he is residing then he is not entitled to HRA benefits.
  • If assessee having a house in one city for which he has taken a home loan and he is residing in another city due to work or similar reason then the assessee is eligible to avail benefits of HRA as well as benefits of housing loan.

Property owned by co-owners:

It may happen that a house is owned by two persons in family. In that case home loan benefits under income tax are applicable in proportion to the ownership structure. For example if the husband and wife owns house in 50:50 ratio the benefits of the interest under Section 24 b as well as the principal & payments under Section 80C are also shared in the same proportion. In this case both the husband and wife can claim interest deduction of Rs.1,50,000/30,000 and repayment up to Rs.1,00,000 is also to be separately consider.

Ideally an individual in the higher tax bracket should opt for a higher ratio of the loan to save on more taxes.

Who can be co-borrower?

Joint home loans can be obtained by an applicant along with his/her spouse, parents or own siblings. “A borrower cannot take a joint home loan with just any person. It is given to married couples or blood relatives such as parents and children,” says Suvrat Saigal, director, retail banking, Barclays Corporate India.

Some banks allow brothers to take a joint home loan provided they both are co-owners of the property. A co-owner is a person who has a share in the property and a co-borrower is one who is liable to pay the loan amount. In some instances, banks insist that co-owners of the home are also co-borrower in a joint loan.

VK Sharma, director and chief executive officer, LIC Housing Finance says, “If co-applicants are spouses, co-ownership of property is not mandatory. However, if co-applicants are parents or siblings, co-ownership of property is compulsory.”

Friends, sisters or unmarried partners living together are generally not permitted to apply for joint home loans. Sejal Patel, financial planner, Bonanza Portfolio says, “Friends, sisters or unmarried couples can be a co-owner of a property but they cannot be a co-borrower in a housing loan.”

When the spouses are the joint applicants, the term of the loan can be a maximum of 20 years, subject to the retirement age of the older applicant. In case the co-applicants are parents and children or siblings, then the maximum term can be 10 years. Also, if the parents income is considered for repayment, then the maximum term may be restricted to the retirement age of the older applicant (in this case that of parent).

Things you must Know about  tax benefits on home loan

1. Home loan borrowers are entitled to tax benefits under Section 80C and Section 24 of the Income Tax Act. These can be claimed by the property’s owner.

2. In the case of co-owners, all are entitled to tax benefits provided they are co-borrowers for the home loan too. The limit applies to each co-owner.

3. A co-owner, who is not a co-borrower, is not entitled to tax benefits. Similarly, a co-borrower, who is not a co-owner, cannot claim benefits.

4. Housing companies usually require all co-owners to be joint borrowers to a home loan. Loan providers specify who can be a joint borrower for a home loan.

5. The tax benefit is shared by each joint owner in proportion to his share in the home loan. It’s important to establish the share for each co-borrower to claim tax benefits.

6. The certificate issued by the housing loan company, showing the split between principal and interest for the EMIs paid, is required for claiming tax benefits.

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  • DIGVIJAY

    Dear sir,we have taken a home loan including my income & my father income ,but we include my mother name as a first applicant in loan ….& she is a house wife ,,,EMI is deduct from my father salary …..if bank give provisional loan interest certificate on my mother name …than,is my father claim for tax benefit ?

    • thesanyamjain

      Yes, your father can claim the tax benefit upto the interest amount he has paid from his account, subject to maximum of Rs.1,50,000.

      • DIGVIJAY

        thanks sanyam

  • ajay

    I am a Indian born US Citizen with OCI (Overseas Citizenship of India card). I am planning to come back to India for good in 2014 with my family. My father owns & resides in a flat in Mumbai and I own a flat on my name in Mumbai which is NOT rented out. No loans on either of those.

    I plan to buy another larger poperty in Mumbai where I can stay and looking at the prices, I might end up having a loan of say 1 Cr with avg interest of appx 10L-11L per year for few yrs. I am familiar with Indian tax forms (ITR-1,ITR-2).

    1] I wanted to know how best I can curcuimvent the limitation of 1.5L max interest deduction ?

    2] Can my New property be classified as ‘Deemed to be Let Out (DLOP)’by adding ‘Annual Lettable value as income, while I am staying

    in it, so that I claim > 1.5L as Interest deduction?

    Kindly advice.

    Ajay

  • sanjay yadav

    dear sir,
    i have taken a home loan with my mom and me… my mom is first applicant and second one is I. The property is owned by my mother and she is a house wife. the EMI of loan paid by the me. How can i claim tax benefit?

    • thesanyamjain

      You cannot. You have to be the co-owner and co-borrower.

      As stated in the article above:
      “A co-owner, who is not a co-borrower, is not entitled to tax benefits. Similarly, a co-borrower, who is not a co-owner, cannot claim benefits.”

      • sanjay yadav

        WHat can i do to take the benefit ?

        • thesanyamjain

          Become the Co-owner of the house..

  • Pallav Jain

    Does the reversal of tax benefit if house is sold before 5 years also apply to section 24(b) or is it only applicable on section 80c for principal repayment?

    • thesanyamjain

      Condition of Reversal of Tax benefits taken earlier is stipulated only under section 80C, there is no requirement of reversal of Interest of home loan.

  • Rachna Jain

    Hi, let’s say I have a house property I bought in 2004 for Rs. 40 lacs with the help of a home loan of Rs. 30 lacs. In 2008, I refinanced this loan basis the market value of my property at that time through another bank, i.e. took a loan of Rs. 65 lacs against the property value of Rs. 80 lacs in 2008 and paid off the first loan. If I sell the property now, I know I can include the interest I paid on the original loan of Rs. 30 lacs under cost of acquisition while computing capital gains. Though the law is silent, to be fair the interest I include in cost of acquisition should be over and above the interest I claimed as deduction u/s 24. My question is, can I also include the interest on the second loan of Rs. 65 lacs (over & above the interest claimed u/s 24) in my cost of acquisition? If so, is there any judgement or guideline etc. supporting this? If not, will I not be understating my cost of acquisition as no interest on loan after 2008 will be included?

  • paras

    I am planning residential property (flat) purchase, and would take Home Loan.

    Can my wife claim IT rebate (for interest and principle), If I have her as Owner and co-applicant for Loan.

    My Wife has been non-working until last Financial Year(with no returns
    filed), but from current Financial year (2013-14) will be in job(hence
    earning).

    Property Purchase and EMI repayment will be from my (husband’s) Bank accounts.

    • thesanyamjain

      Yes your wife can claim IT benefit if you make her co-owner as well as co-borrower. But the payment of EMI of her part should be from her account to claim deduction.

  • Manish

    I have availed a home loan from LIC as a co-owner and my wife is the Mail Applicant under BhagyaLakshmi Scheme. My Wife is non-working and the registeration of house is yet to be done next month. I would like o know, how can i become a Co-Borrower of that house and do at the time of registeration, I need to register the house in both the persons name? Please Advise

    • thesanyamjain

      The primary condition for availing tax benefit from a home loan is that you need to be an owner or a co-owner in the property. However, the tax benefit is available in cases where the spouse is the sole owner of the property but provided this is not done just for the sake of availing tax relief.

      You can become a co-owner in the property by registering it in the name of you and your spouse.

  • shree

    Hi, pls advise, can an employer include loss from house property (more than Rs.1,50,000 & property is let out) of employee during the computation of salary income & in form 16.
    Thanks in advance.

    • thesanyamjain

      Limit of Rs.1,50,000 applies only in case of self occupied else if the property is let out or deemed let out then there is no restriction on the amount of interest claimed. So if you have a property which is let out or DLO then you can claim the whole interest you have paid else limit is Rs. 1,50,000 only.

      • shree

        Thanks for your prompt response. I agree wih the same. Further, please advise whether the employer can include in form 16 of loss from house property more than Rs.1,50,000 as per employee declaration.

        • thesanyamjain

          Yes an employer can adjust loss from house property more than Rs.1,50,000 in Form 16, employee is required to provide a declaration which is properly verified by the taxpayer in the same manner as was required to be done in Form 12C with a computation of such loss from House Property.

          Section Reference:

          1. As section 192(2B)does not make any distinction between Self Occupied House and Let out house, if the property is Self occupied the Loss should be restricted to Rs.1,50,000/- and in case of let out House there is no restriction.

          2. As per Section 192(2B) there is no restriction that the Loss should be restricted to one House only. It has been held in many cases that the Statutory Provisions will prevail over a Circular in case of contradiction between the two. The most recent case is Incometax Officer (OSD) Vs Data Software Research Company (International) Pvt Ltd (319 ITR 40 (AT) Chennai Tribunal relying on the Supreme Court decision in CCE Vs Ratan Melting and Wire Industries (220 CTR 98).

          • shree

            Many thanks for advice. Regards.

  • shree

    Hi, please advise, can wife claim housing loan (principal+interest) repayment benefit for in case where it is paid by her husband & housing loan is in the name of her husband.
    Also, in the same case, if wife is repaying EMI of husband’s housing loan, then can she claim the HL repayment benefit.
    Thanks in advance.

    • thesanyamjain

      Quoted from the above article

      “The tax benefit is shared by each joint owner in proportion to his share
      in the home loan. It’s important to establish the share for each
      co-borrower to claim tax benefits.”

      So it is evident by above statement that to claim tax benefit of home loan and interest on Home loan, one has to have the house as well as home loan in her/his name whether wholly or partially.

      Since house loan is in the name of husband, a wife cannot claim benefit either of repayment of Home Loan or interest on home loan.

      • shree

        Many thanks for your advice. Regards.

  • vivek

    Hi. Vivek here. I am work for a MNC & presently staying in rented house for which i am claiming HRA in tax declaration. I have bought a plot under housing loan for which i am yet to start construction but kept on hold due to personal reasons. I am paying interest & principal for the housing loan. During my tax declaration i have claimed both HRA & Housing loan with my HR, but, my HR says i cannot claim both & i should delete HRA portion. please advice immediately as i need to file my returns. Regards. Vivek

    • thesanyamjain

      One can claim both HRA and interest on Home loan together, there is no restriction for the same. But in your case as you said the home is not yet constructed, I am afraid that you cannot claim deduction of Home loan principal repayment u/s 80C as well as interest on home loan paid u/s 24(b) because these deductions are allowed to be claimed only if the house is completed.

      One more thing that the interest you are paying now can be claimed once the house is completed. (Read: Pre-Construction Period Interest on Home Loan)

  • Manoj Kumar

    I work in Mumbai & stay in a Rented House claiming HRA in my I-Tax return, In Feb-13 purchased my FIRST Home in another city (Indore) making 50% initial payment & builder wants to Register this Home in my name before Mar-13 for which I will pay the balance 50% towards Full payment, as I am unable to do the Home Loan bank formalities in such a short period.
    Is it possible to apply for Home Loan after April-13 with Banks for fully paid & already registered Home in my name, will I get a Home Loan and can I claim I-Tax- Sec 24 Interest deduction on non-occupied property along with continued HRA deduction, please advise.

    • thesanyamjain

      Taking home loan after registry is somehow not possible (not impossible). But in case you succeed in taking loan, you will become eligible to take deduction of Rs. 1.5 Lakhs for interest u/s 24B (budget 2013 increased this limit to Rs. 2.5 lakhs) for self occupied and for any other house property there is no limit of deduction of interest amount.

      Also there is no nexus between Home Loan and HRA, so you will also be eligible to claim HRA deduction.

    • Manoj Kumar

      Thanks for your advice.
      But will I be eligible as I will continue to stay in Mumbai rented House and hence my First & only Indore city house will not become self-occupied, so can I still claim Sec. 24 deductions

      • thesanyamjain

        Declare that house as Self-Occupied and take benefit of Deduction of interest on home loan.

        Look at Section 23(2) of the Income Tax Act. The
        term self occupied property includes property that cannot be occupied by
        the owner due to his business or profession or employment, being
        carried on at any other place in a building that he does not own.

        The Indore House will be treated as a house that could not be occupied by u
        beacause of employment as a consequence the annual value of this house
        will be taken as nil and you will be able to claim deduction of interest on home loan.

  • Sooraj

    I own a home in Delhi which is out on rent. I am currently staying with my parents in their house in Delhi only. I am showing the rental income that I receive from my house for tax purposes. Can I claim HRA for the house I am staying in? (Note- I am not taking any housing loan benefit)

    • thesanyamjain

      Yes You can claim HRA only if your landlord i.e. your parents is assessable for the rental income derived from house which you are paying to them. You could take this step as a tax planning since they are also eligible for basic exemption limit under income tax act.

      • Sooraj

        Thanks Sanyam!

  • Vijay

    If a person owns a residential property and subsequently he becomes the co-owner of another residential property then whether any notional income is taxable in the hands of such person? What tax benefits are available to such person(co-owner) if joint home loan is availed by all co-owners?

    • thesanyamjain

      Indian Income Tax Act classifies house property in three categories: Self Occupied (SOP), Let Out (LOP) and Deemed Let Out (DLOP).

      The Act recognizes a property as SOP only in two situations. First when the owner actually uses the house for the purpose of his own residence. Second when he is unable to occupy his property which is situated in one location and on account of his employment/business/profession carried out at any other place he stays in a rented premise in such other place.

      In case an assessee has two houses he has to opt one house as SOP the other one will be treated has DLOP and a notional rental value (method to calculate such value prescribed under the Act) is considered as the gross taxable rent for such DLOP property. You are allowed to claim a flat deduction of 30% for repairs and maintenance charges.

      Regarding Co-Owner allowability of deduction, he will be allowed to get deduction of interest payment u/s 24B but not for repayment of loan EMI under 80C.

      Regards

  • Vivek

    Hi,

    My dad and I are planning to jointly purchase a second hand flat (to be occupied by my parents, in another city from where I currently work/reside). We would be making part payment through our funds and would be availing home loan(jointly) for the remaining.

    1. Should the loan amount be in the same ratio as the ratio of home ownership?

    2. Since we would be making pre-payments whenever possible, it is difficult to estimate the amounts that we would be repaying the bank in a year. Would it be possible to get different (every year) interest certificate every yr based on our individual contributions.

    3. From tax claim point of view, what all documents would be required to submitted to my employer to avail tax benefits.

    4. My dad is employed in central govt. . He would be eligible for pension, post his retirement. Would this income be considered in computing the tenor of the loan.

    5. From ownership perspective, this would be my first home purchase and second for my dad. Will it have any implications on the tax benefits available.

    Thanks & Regards.

    • thesanyamjain

      Answers to your queries:

      1. It is not necessary but it is advisable to divide loan in the ratio in which the person coming in higher tax bracket will get high EMI to avail maximum benefit.

      2. Your EMI will be fixed and you will have to pay that amount. So there is no question of different interest payment. Please clarify this with your bank.

      3. You will need to show the statement provided by the lender showing the repayment for the year as well as the interest & principal components of the same.

      4. I don’t think it will be considered because in case of co-borrower, if one fails to pay installments as he agreed, the liability of payments comes onto the other borrower.

      5. You will be eligible to get deductions of repayment of loan u/s 80c as well interest payment u/s 24b but your father will get deduction only on the amount of interest paid not of amount of repayment of loan.

      I hope the above answers will solve your queries, feel free to ask any more queries.

      Regards

  • Kalpana R Kurup

    can to husband claim tax benefits but the interest amount is paid by the wife a/c, but the house is on both the name can husband claim tax benefit and also repayment of amount on loan both individually name

    • thesanyamjain

      Husband is entitle to tax benefit on the amount paid from his bank account. Means if repayment of principal is done in 50:50 ratio but the interest is paid totally from wife account then husband is entitle to get tax benefit only of 50% of repayment of principal.

  • venkatesh

    can the husband claim tax benefits on principal and interest re paid for house owned completely by the wife? The loan however has been co borrowed by both. the house is occupied by both. thanks already!

    • thesanyamjain

      No, You cant claim the tax benefit. The property has to be on your name.

      A co-owner, who is not a co-borrower, is not entitled to tax benefits. Similarly, a co-borrower, who is not a co-owner, cannot claim benefits.

  • MANOHAR

    CAN WE CLAIM TAX BENEFIT ON TOP-UP HOME LOAN INTEREST

    • thesanyamjain

      Tax benefit on interest component of the home loans u/s 24(b) is allowed not only for original home loan but also for subsequent loan(s) taken to refinance the first loan. In other words, if the new housing loan is taken to pay off an existing housing loan, tax benefit under section 24(b) is allowed. However, unlike section 24(b), there is no specific mention under section 80C for prepayment of existing home loan by taking a fresh home loan.

      So what it means is that when you repay the balance outstanding principal component of your existing home loan by taking a second home loan, you’ll be entitled for tax deduction under section 80C but within the overall limit of Rs one lakh. Further, when you subsequently start repaying your second housing loan, you’ll be entitled for tax benefit only on the interest portion u/s 24(b) and not on the repayment of principal component u/s 80C.

  • santhosh kamath

    Hi,

    can we take a unsecured home loan from any blood relative and claim the tax rebate under 80C and 24 section of income tax providing the proof of interest and principal repayments. i understand that a max limit of interest payable is 1.5 lakh and under 80c upto 1 lakh for principle repayments.

    • thesanyamjain

      Yes you can take the interest of home loan taken from your relative or friend u/s 24 upto 1.5 lakhs.

      But you can’t take deduction of repayment of loan taken from friend or relative u/s 80C because it has been specifically stated in the section that repayment of loan available for deduction u/s 80C should be from banking and financial institutions.

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