Tax benefits on your new home might get revoked

Posted by Namita Gad on 09 Jan, 2018

Tax benefits on your new home might get revoked

Buying or constructing a house offers many tax advantages on various points starting from payment of stamp duty & registration fees to housing loan interest & principal payment to the financial institution. This brings a big relief to the taxpayers in terms of savings taxes and thereby lowering effective borrowing rate. However, failing to hold the house for a prescribed tenure can result additional tax payments in the year of sale/transfer.

One can avail following tax benefits on certain expenses and payments towards the purchase of a residential house:

Payments towardsStamp Duty & Registration FeesHousing Loan InterestHousing Loan Principal
Section80C24(b)80C
Maximum Allowable AmountRs.150,000 (incl. other deductions u/s.80C)Rs.200,000 in case self-occupied, else total amountRs.150,000 (incl. other deductions u/s.80C)
ConditionsOn payment, but subject to holding a property for a specified tenure (mentioned below)On payment but subject to possessionOn repayment but subject to possession and holding a property for a specified tenure (mentioned below)

Though residential home comes with the bunch of tax benefits, one must be careful before and after claiming the deductions as they are subject to certain conditions. While there is no after-deduction lock-in period for interest on housing loan claim u/s.24(b), the Section 80C stipulates minimum holding period of 5 years to keep the claim of deductions intact. What does this mean for you?

On possession of house property, you can claim stamp duty & registration fees along with principal repayment of housing loan for the respective financial years. However, if you sell or transfer your house within 5 years of possession, the deductions claimed earlier u/s.80C gets revoked. Because of this, the claimed amount of stamp duty, registration fees and principal repayment for all the previous years is clubbed to your taxable income of the year of sale and taxed accordingly as per the income tax slabs.

e.g. If you had bought a house in August 2014 with a housing loan and had claimed about Rs.6Lacs u/s.80C towards stamp duty & principal repayment over the last 3 financial years i.e. from FY2014-15 to FY2016-17. If you sell the house now in January 2018, the entire Rs.6Lacs claimed so far as a deduction will get added to your income for the FY2017-18 and you will have to pay tax on the total income as per the income tax slabs applicable to you.

So, before you decide to sell the property, keep the lock-in period criteria in mind because you might have saved 10-20% taxes on account of claims u/s.80C in the earlier years but on revocation, you might end up paying tax at 30%.