Home Loan Tax Benefits: Learn about Deduction & Documents Required

While purchasing a dream house we always think and analyze whether to invest our own funds or avail housing loans. The selection between one's 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’):

Deduction under section 24(b) of the Act

The borrower of a 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.

Self-occupied 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 a 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 the 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.

Let out property

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.

Additional deduction under section 80EE of the Act (First Time Buyer)

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.

Additional deduction under section 80EEA of the Act (First Time Buyer)

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.

Deduction under section 80C of the Act (Principal of Home Loan)

The borrower of a 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 the borrower is Rs.1,50,000 p.a. The benefit under this section does not cover interest paid on home loans.

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.

Key Documents to be maintained

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:

1. Interest certificate issued by the bank for each financial year

2. Purchase agreement or ownership proof containing name of borrower as owner

3. Loan sanction letter

4. Bank statement reflecting transactions pertaining to home loan

5. Rent agreement and proof of receipt of rental income

6. Completion certificate and occupancy certificate

 Above list is not exhaustive.

Conclusion

The home loan provides tax benefits under section 24(b), 80C, 80EE, and 80EEA. Therefore, a home loan is providing additional tax-saving options to the purchaser of a 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.

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