Home Loan Rules you might not know
Finance Minister P.Chidambaram has given a gift to common men in terms of additional deduction of Rs.1 lakh for Home Loan under section 80EE in Budget 2013.
(Recommended Read: Additional deduction of Rs.1 lacs for home loan u/s 80EE)
But before advancing to avail Home Loan, there are some questions which you might not know or if you knew them, you never give a thought of the impact.
1. Tax deductions for House under-construction:
The language of section 80C says that the “for the purpose of purchase or constructions of residential house property the income from which is chargeable to tax under the head “Income from House Property”.
It is clear from above that till the house is not constructed and the possession is not taken over, deduction of house loan principal repayment is not available. You need to have possession and certificate of ownership to claim tax under 80C. In simple words assessee should be the owner of the house property.
But this is not same with the interest deduction u/s 24B. You can claim the deduction of interest paid on home loan later in 5 equal installments for next 5 yrs from the end of financial year of possession.
Recommended Read: Housing Loan Interest & Principal Deduction for Pre-Construction Period
2. Selling the House before 5 yrs reverses the tax saved earlier
In case Tax benefit under Section 80C for housing loan principal repayment has been claimed by assessee and subsequently he/she sells the house within 5 years of purchase, the benefit will get reversed and the tax-free amount claimed earlier towards principal repayment will be added to the taxable income of subsequent year.
- Five years term is counted from end of financial year in which the possession of the house property is gained. Deduction for home loan principal and interest payment can only be claimed from the year in which possession is taken.
- You need to compute deduction reversal for each year in which deduction was taken against home loan principal. In case other tax saving investments in a year were already 1 lakh without considering principal, there is no need to reverse that deduction. Say in case principal is partially used to fill 1 lakh limit (e.g. rest of the investments sums up to 90K) then only that partial amount would be reversed.
- In case you had other 80C eligible deductions as well and total amount was more than one lakh, you can get 80C home loan principal benefit revered only to an amount equal to one lakh – other 80C deductions. If total eligible 80C investments were 1.30 lakh and home loan part was 45K only, then only 15K would be added to taxable income. This amount needs to be computed separately for each year in which tax benefit was taken.
3. Loan taken from Friends and Family is eligible for Deductions (Interest)
The deduction of principal repayment cannot be claimed if you have taken home loan from you relatives or friends or from any other source which is not the Specified Institution/Department. But there is no such restriction on the interest amount means you can still claim the interest on the loan under section 24 , which is upto Rs. 1.5 lacs per year.
Loan should be taken from Specified institutions/department given below
- Central or State Government
- Any Bank including co-operative bank
- LIC or National Housing Bank
- Public company formed and registered in India or co-operative society with main object to provide long term finance for construction purchase of houses in India.
- Assessee Employer if public company or public sector company or university established by law or a college affiliated to such university or local authority or co-operative society.
4. 80C is not allowed for loans taken for Extension or Renovation of House
No deduction is allowed for the repayment of the principal part under section 80C, if the loan is taken for extension or addition or alteration to, or renovation or repair of house property of your existing house. But you will be able to claim interest amount under sec 24(b), the limit in this case is only upto Rs 30,000 for self-occupied properties. However for house which is let-out (rented or second home which is not occupied), there is not limit for tax deduction.
5. Loan for More than One House
Tax benefit of home loan is confined to one residential house property only means no deduction of repayment of principal is allowed u/s 80C if it is for your second house. However, interest paid on home loan for second house can be claimed as a deduction u/s 24(b) without any limit.
(Recommended Read: Can Investing in Second House reduce Tax Burden?)
Few points to you might not know about Home Loan:
- There is no requirement that for loan, house property should be mortgaged to the institution from which the loan has been taken, but it should be used for the purpose of purchase /construction of house property.
- The benefit is available on payment basis, no matter to which year payment is relates to or payment overdue or not.
- The above benefit is available even assessee already has another house property.
- The tax benefit under section 80C is available on residential house property only and not available on commercial house property.
- Stamp duty, registration fee and other expenses for the purpose of transfer of such house property to the assessee is also eligible for deduction under this section even assessee has not taken any loan. (Refer: Stamp Duty and Registration Charges Deduction u/s 80C.)