Home Loans- Income Tax Exemption – Financial Guide – Series 2 – Part 1

Every one dreams of having his own home. Home provides security, control, belonging, identity, and privacy, among other things. “But most of all, it’s a place that provides us with a centering or belongingness — a place from which we leave each morning and to which we return each evening.”

But looking into the financial constraints of building a house or purchasing a Flat, most of the earning class still lives in rented facilities. To encourage middle class and earning fraternity of public and with government policy aim of ‘Housing for all by 2022’, Government of India has bought in place several tax exemptions for availing a Home Loan. As you would be wondering, why Government is interested in having you a house as Housing is also an investment activity and provides impetus to economic growth. Because of its forward and backward linkages, even a small initiative in housing will propel multiplier effect in the economy through the generation of employment and demand.

This article brings to you in a very simplified layman language to understand the same and implement in your saving of Income Tax with several practical examples.

So, Lets start…..

Today housing loan can be availed from varied sources be it commercial scheduled Banks (Government or Private), NBFCs, Subsidiaries of Banks i.e CANFIN Homes, PNB Housing Finance etc. Interest rates have also fallen to a very low level starting from 6.75% (Union Bank of India) and upwards. This low interest levels have prompted many people to home loans and move to their own dream houses.

So whats the benefits besides having your own house and taking home loan

1. Sense of accomplishment –

Buying a home is one of the biggest financial investments you may make in your lifetime; and that’s not just because of the sentimental value. The sum that most of us sink into our home (and home loan of course if taken) does make it the largest component of our investment portfolio!

2. Capital Appreciation – No need to elaborate I feel

3. Lower Interest Rates

4. Tax benefit on interest paid

5. Tax benefit on principal payment

6. Buying a house vs Renting a house – This is very subjective and depends on case to case basis calculation but buying a home will pay off most for people who plan to stay in one location for a long horizon (say 15 years) and those who are in the higher tax brackets. Apart from this, property prices have to appreciate at a reasonable rate, preferably higher than inflation.

On terms of tax benefits, there are various sections of IT Act which we may to understand and implement which is the major talk point of this article.

1.    Section 80C: Deduction up to Rs 1.5 lakh on home loan principal repayment

Tax deduction up to Rs 1.50 lakh under Section 80C for repayment of principal component of a home loan can be availed by you for purchase or construction of residential property.

N.B – Construction of property must be completed within 5 years from the end of the financial year in which the loan was taken. Also, if the property is transferred or sold by you within 5 years, tax deductions claimed under Section 80C so far till date of sale should be reversed, i.e. added back to your income in the year of sale, and then taxed according to your tax slab.

2.    Section 24b: Deduction up to Rs 2 lakh on interest repaid during pre and post construction period

So, considering two scenarios under the section

1. Interest on Home loan during Pre-construction Period – When Home loan is availed for construction of house, tax deduction for interest paid during this period (which banks will anyway charge in gestation period or construction period) under Section 24b can be claimed on interest paid for up to 5 years (in 5 equal instalments).

• Interest on Home loan during Post-construction Period- As far as interest paid in the post-construction period for self-occupied property is concerned, tax deduction up to Rs 2 lakh can be claimed under Section 24b of the Income Tax Act. In case of a let out property, there is no upper limit for claiming interest deduction. Remember that this deduction can only be claimed from the year in which construction of the house is completed.

Note: the maximum amount that can be claimed remains capped at the overall limit of Rs 2 lakh per year, including both pre and post construction period’s interest repayment.

• Section 80EEA: Additional interest deduction of up to Rs 1.5 lakh under affordable housing for home loans sanctioned between 1st April 2019 and 31st March 2020 and now extended till 31^st March 2021

The Budget 2019 provided major impetus to the ‘Housing for All’ mission by announcing additional deduction of Rs 1.50 lakh on interest payment made on home loans availed between 1st April 2019 and 31st March 2020. The same benefits were extended till 31^st March 2021 in Budget 2020. In order to qualify for tax deduction under section 80EEA, the value of housing property has been capped at Rs 45 lakh.

Note-to be eligible for tax benefits under Section 80EEA:

• Housing loan must be taken from a financial institution or a housing finance company for buying a residential house property.

• Stamp duty value of the house property should be Rs 45 lakhs or less.
• The taxpayer should be a first-time home buyer. The taxpayer should not own any residential house property as on the date of sanction of the loan.
• Carpet area of the house property should not exceed 60 square meter ( 645 sq ft) in metropolitan cities of Bengaluru, Chennai, Delhi National Capital Region (limited to Delhi, Noida, Greater Noida, Ghaziabad, Gurgaon, Faridabad), Hyderabad, Kolkata and Mumbai (whole of Mumbai Metropolitan Region)
• Carpet area should not exceed 90 square meter (968 sq ft) in any other cities or towns.
• Borrowers living in rented houses can also claim this deduction. Moreover, the deduction can only be claimed by individuals for the house purchases jointly or singly.
• If a person jointly owns the house with a spouse and they both are paying the instalments of the loan, then both of them can claim this deduction. However, they must meet all the conditions laid down.

4. Section 80C: Deduction for Stamp Duty and registration charges

Borrowers can also claim tax benefits on stamp duty, registration charges and other expenses which are directly related to the transfer of the property, which were paid during purchase of house property. These charges can be claimed within the overall limit of Rs 1.5 lakh under section 80C. Remember that such deduction can only be claimed in the year in which these expenses have incurred.

So as you can observe, a first time buyer can make a tax exemption on interest paid of up to Rs 3.50 Lakh in a year and on principal amount of Rs 1.50 Lakhs.

So, start searching for your dream house and also let me know if I could be of any help to you…..