17-Nov-2022 | Affordable Housing
While
purchasing a dream house we always think and analyze whether to invest our own
funds or avail housing loan. The selection between own fund and a housing loan is
a matter of choice and depends on various factors such as the source of income, the purpose of buying a house, legal & tax aspects, fund availability, cost of the house, etc. Therefore, it is important for a buyer to understand all the
aspects before making a choice between their own fund and a home loan.
Home loan is an arrangement between the financial institution and the buyer for extending
funds to the buyer for purchasing a house. Under the said arrangement buyer agrees to
repay the loan along with interest to financial institutions in agreed monthly
installments. The home loan can be utilized by the buyer for purchases of under-construction property or ready-to-shift house / flat or repair/renovation of the house.
Let’s
try to understand the tax benefits available to the buyer on opting of a home
loan.
Tax Benefits on Home Loans
There are various tax benefits
available to the borrower of home loans and from an income-tax point of view. The below
table summarizes the tax benefits which can be explored by the borrower under
Income-tax Act, 1961 (‘the Act’):
Particular |
Tax
Benefit |
Maximum
Benefit Amount |
Interest
on home loan |
Deduction
under section 24(b) of the Act |
Self-occupied
property– up to Rs.2,00,000 Let-out
property – Actual interest paid
|
Interest
on home loan
|
Additional
deduction under section 80EE of the Act
|
Up to Rs.50,000 |
Interest
on home loan |
Additional
deduction under section 80EEA of the Act
|
Up to Rs.1,50,000 |
Repayment
of Principal of home loan |
Deduction
under section 80C of the Act
|
Up to Rs.1,50,000 |
The borrower of home loan can
claim deduction of interest paid on home loan under section 24(b) of the Act while
computing income from house property. The tax benefit under the said section varies
in case of self-occupied property and let-out property.
The self-occupied property means
a property owned by the person throughout the year for his own residence and is
not let-out property (i.e. rented) at any point of time during the year. The interest
paid on home loan for acquisition or construction of self-occupied property can
be claimed as deduction to the extent of Rs.2,00,000 p.a. by the borrower.
A person can own two properties
as self-occupied property during the financial year and claim benefit of
interest paid on home loan to the extent of Rs.2,00,000 per annum.
E.g. Mr. Ram owns two flats in
Mumbai. During the year, he has paid interest of Rs.2,50,000 on housing loan
availed for both the houses. In such case, he can declare both the houses as
self-occupied property in his income-tax return and claim benefit of interest
paid on home loan to the extent of Rs.2,00,000 p.a.
The property should be acquired /
constructed within 5 years from the end of financial year in which loan is availed
(i.e. disbursed) by the borrower from the bank or financial institution. In
case there is any delay in acquisition / construction of property beyond 5
years from the date of disbursement of loan then the benefit of interest on
such self-occupied property shall be restricted to Rs.30,000 p.a.
Further, in case the self-occupied
property is under construction property, then the benefit of interest paid on the home loan shall be available to the borrower in 5 equal installments from the
year of completion of such property.
Under a co-borrower arrangement, the
benefit of interest paid on a home loan can be availed by the borrowers subject
to the condition that the house property is co-owned by both borrowers.
Any house property let out at any
point of time during the year is treated as let-out property or “not
self-occupied property”. The interest paid on a home loan for the acquisition or
construction of let-out property can be claimed as a deduction to the extent of actual
interest paid by the borrower during the financial year.
In case of a let-out property, interest
paid on home loan in excess of rental income shall be allowed to be set-off
against another source of income as house property loss to the extent of Rs.2,00,000
p.a.
It is interesting to note that in
case any property is self-occupied by the borrower for part of the year and
let out for part of the year, then for that financial year the said house
property shall be treated as ‘let-out property’ and benefit of interest on the home
loan shall be available to the extent of actual interest.
As a part of the Government of India’s
incentivization scheme to promote ‘Housing for All’ the first-time home
buyer is eligible to claim an additional deduction of interest on a home loan to
the extent of Rs.50,000 p.a. under section 80EE of the Act. It is interesting
to note that this benefit is, in addition, to the benefit available under section
24(b) of the Act.
The additional benefit of
interest is available for loans sanctioned during the period 1 April 2016 to 31
March 2017 wherein the cost of the house property being acquired should not be more
than Rs.50,00,000 and the loan sanctioned for the purchase of such house property is
not more than Rs.35,00,000. The home loan should be availed from banks, banking
institutions, or housing finance companies.
Since the intention of the Government is to incentivize first-time buyers of house property, therefore, on
the date of sanction of loan, the borrower should not own any house property.
In case the entire amount of
interest on a home loan is claimed as a deduction under section 24(b) of the Act,
then the additional benefit of interest shall not be available under section
80EE of the Act.
In continuation of the goal of the Indian
Government to promote ‘House for all', the first-time buyer of a house
availing housing loan has been provided with an additional deduction of
interest on the house loan to the extent of Rs.1,50,000 p.a. This benefit of
interest is in addition to deduction under section 24(b) of the Act. To
illustrate if a person has paid interest of Rs. 4,00,000, he can claim a deduction of interest of Rs.2,00,000 under section 24(b) and another Rs.1,500,000
under section 80EEA.
The benefit under this section is
available for loans sanctioned during the period 1 April 2019 to 31 March 2022
wherein the stamp duty value of the house property being purchased does not exceed Rs.45,00,000.
The loan should be availed from banks, banking institutions, or housing finance
companies.
Since the intention of the Government is to incentivize first-time buyers of house property, therefore, on
the date of sanction of loan, the borrower should not own any house property.
In case the entire amount of
interest on a home loan is claimed as a deduction under section 24(b) of the Act,
then the additional benefit of interest shall not be available under section
80EEA of the Act. To illustrate if a person has paid interest of Rs.1,90,000,
he can claim a deduction of interest of Rs.1,90,000 under section 24(b) of the
Act. The additional benefit under section 80EEA shall not be available to the
borrower as the benefit of 80EEA is in excess of interest claimed as a deduction
under section 24(b) of the Act.
The
borrower of home loan has an option to claim deduction of repayment of principal
amount of funds borrowed for construction or purchases of home in India for
residential purpose under section 80C of the Act. The maximum amount of benefit
which can be claimed by borrower is Rs.1,50,000 p.a. The benefit under this
section does not cover interest paid on home loan.
It is to
be noted that the house property on which benefit has been claimed under
section 80C should not be transferred or sold before expiry of 5 years from the
end of financial year in which possession has been received by the borrower. In
case house property is transferred or sold before expiry of 5 years, then no
deduction shall be allowed to the borrower, the entire amount of deduction
claimed in preceding years on such house property shall be deemed to be income
of the borrower in the year of transfer.
In order
to substantiate the benefit of interest and repayment of principal amount of
housing loan, it is suggested that below documents should be maintained by the
borrowers:
·
Interest
certificate issued by the bank for each financial year
·
Purchase
agreement or ownership proof containing name of borrower as owner
·
Loan
sanction letter
·
Bank
statement reflecting transactions pertaining to home loan
·
Rent
agreement and proof of receipt of rental income
·
Completion
certificate and occupancy certificate
Above list is not exhaustive.
The home loan provides tax
benefit under section 24(b), 80C, 80EE, and 80EEA. Therefore, a home loans is providing
additional tax-saving options to the purchaser of house. However, the borrower
needs to be very mindful of conditions prescribed under each section and
documents required to substantiate the tax benefit availed under each section.