Additional Tax Benefit of Interest on Home Loan

In order to promote “Housing for all” and to enable home buyers to purchase houses at low-cost funds, the Government of India provides various tax benefits on interest on housing loans paid by the buyer.  The below table summarises the tax benefits which can be explored by the borrower under the provisions of Income tax Act, 1961 (‘the Act’):

The majority of the buyers are aware of the deduction available under Section 80C and 24(b) of the Act. However, they are not aware of the additional deduction of interest which is provided under Section 80EE and 80EEA of the Act. Let’s understand the additional tax benefit available to the buyer under Section 80EE and 80EEA of the Act.

Section 80EE: Interest on loan taken for residential house property:

In order to incentivize the affordable housing sector under the objective of “Housing for all”, the Government of India provides additional deductions on home loan interest for first-time homebuyers under Section 80EE of the Act. tThis deduction is  allowed to individual buyers to claim additional deductions beyond the ones available under Section 24(b). The benefit under this Section is restricted to housing loans sanctioned between the financial year 2016-17 i.e. from 1 April 2017 to 31 March 2017. Any loans sanctioned beyond FY 2016-17 are not eligible for benefit under this Section.

Key features of Section 80EE of the Act:

1. Eligible Person: The benefit under Section 80EE of the Act is available to individual first-time homebuyers.  It means that the individual claiming deduction under Section 80EE of the Act should not own any residential house property on the date of sanction of loan. 

2. Type of loan covered: The benefit under Section 80EE is available for interest paid on housing loans i.e. the loan should be taken only for the acquisition of residential house property. Interest paid for loans taken for the purpose other than acquisition of residential house property is not covered within the ambit of this Section. 

3. Date of sanction: The housing loan sanctioned by a financial institution during the period beginning on 1^st day of April 2016 and ending on 31^st day of March 2017 is eligible for this section. Any loan sanctioned before 1 April 2016 or after 31 March 2017 is not covered within the ambit of this section. 

4. Entity eligible for sanctioning housing loan: The loan should be sanctioned by the financial institution. The ‘financial institution’ means banking company, or any bank or banking institution or a housing finance company.

5. Loan amount: The loan sanctioned for acquisition of residential house property should not exceed Rs.35 lakhs.

6. Property value: The underlying house property which is to be acquired should not have value exceeding Rs.50 lakhs. 

7. Maximum deduction threshold: The maximum deduction of interest on housing loans allowed under this section for a particular financial year is Rs. 50,000.This deduction is in addition to the deductions available under Section 24(b) for home loan interest. The benefit of Section 24(b) of the Act should be availed first and thereafter, benefit of Section 80EE and Section 80EEA of the Act should be availed. In case deduction under Section 80EE and Section 80EEA of the Act is claimed first rather than Section24(b), then in such case interest paid on housing loan shall not be eligible for deduction under Section 24(b) of the Act.

8. Deduction period: The additional deduction of interest on housing loan is available for the financial year beginning from 1 day of April 2016 and subsequent years, subject to aforesaid conditions.  

Interesting facts of Section 80EE:

1. Old vs new house: The underlying residential house property to be acquired can be existing or new. There is no segregation / mandate to acquire existing or new house property. The only condition is that acquisition of residential house property should take place. 

2. Co-ownership: If the property is owned jointly, both co-owners are eligible to claim a deduction under Section 80EE if they fulfil the eligibility criteria.

3. Refinance: In case the loan has been availed as refinancing against house property already acquired, then such loan shall not be eligible for deduction under this Section.

4. Difference between Section 80EE and Section 24(b): The basic difference between Section 80EE and Section 24(b) of the Act is that the provisions of Section 80EE provides additional relief / deduction of interest paid on residential house property as compared to Section 24(b) of the Act.

Difference between Section 80EE and Section 24(b)

Section 80EEA: Interest on loan taken for residential house property:

The benefit of Section 80EE of the Act is restricted to loans sanctioned during the FY 2016-17. In order to continue incentivizing the affordable housing sector under the objective of “Housing for all” and to enable home buyers to have low-cost funds at his disposal, the Government of India introduced new Section 80EEA of the Act vide Finance Act 2019.

The section provides additional deductions on home loan interest for first-time homebuyers of Rs.1,50,000. The benefit under this section is in addition to deductions available under Section 24(b). The benefit under this Section is restricted to housing loans sanctioned between the financial year FY 2019-20 to FY 2021-22 i.e. from 1 April 2019 to 31 March 2022. Any loans sanctioned beyond March 2022 are not eligible for benefit under this Section.

Key features of Section 80EEA of the Act:

1. Eligible Person: The benefit under Section 80EEA of the Act is available to individual first-time home buyer. It means that the individual claiming deduction under Section 80EEA of the Act should not own any residential house property on the date of sanction of loan. 

2. Type of loan covered: The benefit under Section 80EEA is available for interest paid on housing loans i.e. the loan should be taken only for the acquisition of residential house property. Interest paid for loans taken for the purpose other than acquisition of residential house property is not covered within the ambit of this Section. 

3. Date of sanction: The housing loan sanctioned by a financial institution during the period beginning on 1^st day of April 2019 and ending on 31^st day of March 2022 is eligible for this Section. Any loan sanctioned before 1 April 2019 or after 31 March 2022 is not covered within the ambit of this Section. 

4. Entity eligible for sanctioning housing loan: The loan should be sanctioned by the financial institution. The ‘financial institution’ means banking company, or any bank or banking institution or a housing finance company.

5. Loan amount: There is no capping on loan amount which is to be sanctioned for acquisition of residential house property unlike Section 80EE of the Act. 

6. Property value: The underlying house property which is to be acquired should not have stamp duty value exceeding Rs.45 lakhs. The stamp duty value means value adopted or assessed or assessable by any authority of the Central Government or State Government for the purpose of payment of stamp duty in respect of immovable property.

7. Maximum deduction threshold: The maximum deduction of interest on housing loans allowed under this section for a particular financial year is Rs. 1,50,000. This deduction is in addition to the deductions available under Section 24(b) for home loan interest.

8. Deduction period: The additional deduction of interest on housing loan is available for the financial year beginning from 1 day of April 2019 and subsequent years, subject to aforesaid conditions.

Interesting facts of Section 80EEA of the Act 

1. Sanction vs Disbursement: The loan has to be sanctioned by the financial institution during the financial year 2019-20 to FY 2021-22; it may be disbursed subsequently; further, the house also may be acquired subsequently.

2. Agreement value vs Stamp duty value: The property to be acquired should have stamp duty value not exceeding Rs.45 lakhs, however, there is no restriction on property agreement value. Therefore, property with stamp duty value of upto 45 lakhs but purchased at higher amount is eligible for deduction under this Section.

3. Section 80EEA and Section 24(b): Similar to Section 80EE of the Act, the provisions of Section 80EEA of the Act also provides additional relief / deduction of interest paid on residential house property as compared to Section 24(b) of the Act. The major bucket of difference between these sections are similar to the difference between Section 80EE and Section 24(b) of the Act.

However, it is to be noted that in both Section 80EE and 80EEA of the Act, first limit of Section 24(b) should be exhausted and thereafter for remaining interest limit of above two sections i.e. 80EE and 80EEA, as applicable, should be consumed. In case deduction of interest is claimed first under Section 80EE or 80EEA of the Act, then the said interest shall not be eligible for benefit under Section 24(b) of the Act.

Comparison of Section 80EE, 80EEA & 24(b) of the Act:

Process of Claiming deduction under Section 80EE or 80EEA of the Act:

In order to claim deduction under Section 80EE or Section 80EEA of the Act pertaining to interest paid on acquisition of house property, the individual first-time home buyer needs to follow below steps:

1. File its annual income-tax return (ITR) in prescribed form on income-tax portal within the timelines prescribed under the Income-tax Act.

2. While filing the ITR, the individual should collate all the mandatory documents pertaining to house loan sanctioned, interest paid and house property acquired. For e.g. 

   1. Loan sanction letter;

   2. Loan disbursement letter;

   3. Bank statement reflecting payment related to property acquisition; 

   4. Interest certificate issued by financial institution declaring amount of interest paid during the year;

   5. Stamp Duty valuation report;

These documents are also important to substantiate deduction claims under Section 80EE or Section 80EEA of the Act before the revenue authorities during scrutiny / audit of ITR filed.

It's important to note that tax laws can change, and it's advisable to consult with a tax professional or refer to the latest information on the Income Tax Department's official website to ensure compliance with the most recent regulations.

Conclusion

The provisions of Income-tax provide various incentives/deductions for interest paid on housing loans. The provision of Section 24(b) of Act provides for general deduction of Rs.2 lakhs, however, in order to provide “House for all”, the Government of India is providing additional benefit of interest paid on house property under Section 80EE and Section 80EEA of the Act. By providing additional deductions on interest payments for first-time homebuyers, the government encourages citizens to invest in real estate and fulfil the dream of owning a house.

It is to be noted that first user should consume the limit of Section 24(b) of the Act and thereafter, avail benefit of Section 80EE and 80EEA of the Act. Further, the deduction under Section 80EE and Section 80EEA of the Act is subject to conditions prescribed, which needs to be fulfilled by the individual first time buyer.

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