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.
- Principal Payment (deductible u/s 80C read with section 80CCE)
- 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:
- This principle repayment is a direct deduction from your total income for that assessment year up to Rs. 1,00,000.
- If assessee already invested in other avenues like PPF or etc then the sum total should not exceed Rs.1,00,000.
- 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.
Interest on Loan taken from Friends and Relatives
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
- Interest for the P.Y.2012-13 on Rs.10,00,000 @ 10% is 1,00,000
- 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
- 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.
- In any other case interest up to maximum Rs.30,000 is deductible.
- 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.