Home is where my Heart is!! It is just a saying but if you understand the meaning of it then its much more than a saying. Owned house is what one can dreamt of. It is one of biggest investment in our life. This can be possible through the housing loan. Section 24 of Income tax Act also provides tax benefits on home loan by way of rebate and interest deductions.
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) Principle payment
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. You also need to know the list of documents for home loan
How Principle Repayment towards Home Loan helps to reduce Income Tax?
Income tax has Sec 80 C for home loan principal repayment deduction. It reads assessee investing in any of the avenues prescribed in the section then he is eligible for the deduction of a maximum amount of Rs. 100000. It includes investment in PPF, PF, LIC, ELSS and such instruments. It further includes principle repayment of home loan
Conditions for claiming deduction under 80C are:
1) This principle repayment is a direct deduction from your total income for that assessment year up to Rs. 100000.
2) If assessee already invested in other avenues like PPF or etc then the sum total should not exceed Rs.100000.
3) Principle repayment considered for deduction only if the loan is taken for self occupied house. Deduction in respect of principle 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
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.800000 on 01-04-2009 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 15-06-2011. The entire loan is still outstanding.
In this case interest allowable for deduction for A.Y.2012-13 will be
1) Interest for the P.Y.2011-12 on Rs.800000 @ 10% 80000
2) Interest for the pre-construction period i.e. from
01-04-2009 to 31-03-2011 (1/5th of Rs.160000) 32000
Total interest allowable 112000
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. 150000.
2) In any other case interest up to maximum Rs.30000 is deductible.
3) This ceiling of Rs.150000/30000 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 then benefits of the interest under Section 24 b as well as the principle 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.150000/30000 and repayment up to Rs.100000 is also to be separately considered