Tax Implications on Home loans

There are two categories of deductions: on repayment of the interest, and on repayment of the principal loan amount.

Section 24(b) of the Income Tax Act deals with the former, and Section 80 C deals with the latter. Below, we discuss the three assessment scenarios described above (depending on the purpose of the loan) as they impact your interest repayment.

Loan to buy built property:

First, let us consider a loan taken to buy an already built residential property. If you occupy the property yourself, much depends on when you took the loan. If it was on or before March 31, 1999, the deduction on the actual interest paid is subject to a maximum of Rs 30,000. If you took the loan on or after April 1,1999 , the limit goes up to 1.5 lakh.

But what if you bought a ready built property and rented it out? First of all, we should mention that if you have more than one residential property in your name, you can choose one for your own use, and the rest are either actually let out, or deemed to be out for tax assessment purposes (it doesn’t matter if they are unoccupied; they will still be deemed to be let out notionally). Having cleared that up, we can move on to the deductions on a loan for buying an already built property that is let out. You can claim a deduction on the actual interest paid or accrued, regardless of when you took your loan. There is no limit on the amount.

Loan to build a home:

Again, if you build a residential property that you yourself will occupy, you can claim up to Rs 30,000 a year of you took the loan on or before March 31,1999, and up to Rs 1.5 lakh a year if you took the loan on or after April1, 1999. If you borrowed money in build a residential property that is let out (or deemed to be out), you can claim exemption on the actual interest paid or accrued, without any upper limit.

Loan for renewal or repairs:

If you occupy the property and took the loan on or before March 31, 1999, you can claim an exemption of up to Rs 30,000 a year. If you took the loan on or after April 1, 1999 you can claim an exemption of up to Rs 30,000 also. If you took the loan to repair or renew an existing residential property you claim deduction on the actual interest paid or accrued, up to any amount.

Principal repayment

Exemption available under Section 80C of the Income Tax is up to Rs 1 lakh, including all other eligible instruments. However, it applies only to the repayment of the principal loan amount for buying or building residential property not for renewing or repairing an existing property. If you borrowed money to repair, renew, or rebuild an existing property, you cannot claim this exemption.

Rules on Interest deduction

Keep in mind the following rules, under Section 24(b) which determine your exemptions on house loan interest payments.

Interest deduction is available on an ‘interest due basis’. That means even if you did not actually pay any amount towards the interest, you can still claim the deduction.

No deduction is available for penal interest charge on earlier unpaid interest.

If you own the residential property jointly with some one, and all owners’ shares are definite and ascertainable, all joint holders can claim interest deductions from their incomes, according to their share in the property. But this is subject to a limit of Rs 30,000 or Rs 1,50,000 per assessee.

There is no limit on the number of housing loans for which you can claim exemption – subject, of course, to the limits that apply to you.

If you take a new home loan in order to repay an old one, you can claim deductions on the interest on the new one, too.

You can claim exemptions only if you are the original borrower. If you make an interest payment on someone else’s behalf, the exemption is not available. If, for example, you acquired a residential properly as inheritance or a gift, and you are repaying a previous loan attached to that residential property you can claim a deduction towards previous loan repayment.

If you took the loan to build a residential property, construction should be completed within three years of the end of financial year in which you took the loan. So, for example, if you took a loan on June 1, 2007 construction should be complete by March 31, 2011.

You cannot claim deduction during the construction period. You can claim it from the year of completion, and interest of the construction period is allowed in five equal installments. So, continuing with our example above, the loan was taken in the 2007-08 financial year, and construction completed in the 2010-11financial year. Interest for 2010-11 would be allowed in full, irrespective of the date of completion. Interest from the financial years 2007-08 to 2009-10 would be allowed in five equal installments, in which the first installment would be available for deductions in 2010-11 – apart from the regular interest of the year. This total deduction is also subject to the maximum limit specified earlier.

No deduction of interest is allowed unless you produce a certificate from the financial institution that gave you the loan. This document must indicate the amount of the original interest paid / accrued (not penal interest charged on any unpaid interest) during the ear under consideration.

Rules on repayment deduction

Keep in mind the following rules, under Section 80C, which determine your exemptions on repayment of the original loan amount.

The repayment deduction is available for loans taken from specified institutions. If you took a loan from a person or institution that is not specifically eligible, you cannot claim exemption.

If you calmed an exemption under Section 80C you may not sell the property for five years after you acquire it (or after construction is complete, as the case may be). If you sell before this period, the aggregate deduction claimed in all previous years will be added back to your assessed income for the year in which you sell the property.

You can claim an exemption on stamp duty, registration fee, and other expenses related to your property purchase. We believe this clause is useful if you acquired property from your own funds, without taking a loan from a financial institution under Section 80C (xviii) (d). Of course, nobody in their right mind would take a home loan because of its tax benefits.

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