Double Benefit on Taxes on Housing Loan

The Government is encouraging Individuals to invest in House Property and providing greater benefits to them by giving tax relaxation. If you are planning to buy a new house then it would be wise to go for housing loan even as it helps you to save tax on income. Payment of housing loan gives you an opportunity to save taxes by claiming benefit of both Interest as well as Principal repayment of the Housing Loan when you go for e-filing of tax returns. The Income Tax Act provides deduction under section 80C against Principal Repayment and exemption under Section 24(b) on Interest payment of Housing Loan.

There are 2 possible situations which would determine how you can claim the tax benefits. A Housing loan can be obtained against a property whose possession is received or is yet to be received as it is being constructed.

Housing Loan taken and possession received in the same year.

Housing Loan can be taken for purchasing or constructing a new house property. When a loan is taken in the same year in which the house property is purchased or constructed, one can enjoy the tax benefits on payment of both principal and interest component of the housing loan.

Principal: The repayment of principal component of housing loan is entitled for exemption under 80C up to Rs. 150,000 along with all other permissible instruments like, life insurance premium, PPF, ELSS, NSC etc. 80C deduction for principal repayment of housing loan is allowed as soon as you start repaying the loan. This tax benefit can be claimed irrespective of the fact that the property is being self occupied or let out.

For claiming such deduction there are certain requirements to be fulfilled i.e. principal repayment will be considered for deduction only if the loan is not taken for improvement, extension, renovation or alteration of an existing house. Further, it cannot be claimed if an individual has taken home loan from relatives or friends or from any other source, which is not mentioned as Specified Institution/Department.

Interest: Section 24(b) of Income Tax Act entitles you to claim exemption on interest payment of housing loan against the property purchased or constructed. The benefit can only be taken from the year in which the possession has been received. The actual interest payable is allowed as deduction subject to maximum of Rs. 200,000 for a Self-Occupied property. In the case of Let-Out property, there is no maximum limit and the entire amount of interest payment can be taken for tax benefit.

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. 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.

Housing Loan taken but possession received next year or later.

Often it is seen that housing loan is taken but the possession of the property is received in the next or later financial year. It may be because the property is not completed or constructed. Tax benefits of housing loan can still be enjoyed but there are certain restrictions to it.

Principal: Till the house is not constructed and the possession is not taken over, deduction on house loan principal repayment is not allowable. You need to have possession and certificate of ownership to claim tax under section 80C. In simple words it is said that you should be the owner of the house property. After the possession is received, the deduction can be claimed normally up to a maximum of Rs. 1.5 Lakhs under section 80C.

Interest: The interest deduction u/s 24(b) can be claimed after the possession of the house property is taken over. However, the total amount of interest paid on home loan prior to possession of house property as can be claimed as pre-construction interest in 5 equal installments for next 5 years from the financial year in which possession is received. The pre-construction interest is allowed upto a limit of Rs 2 Lakhs including the current year interest payment on home loan. This can be claimed only after the house is ready and possession is taken over. If the house has been let out, the taxpayer can claim the entire interest component as deduction from the rental income without any restriction.