How can a home loan save taxes for you?

Posted by Namita Gad on 02 Apr, 2018

How can a home loan save taxes for you?

Owning a house is one financial dream which many of us nurture, but surging costs of real estate in metro-cities makes it nearly impossible to own a property without a housing loan. Availing housing loan is advisable for two reasons: currently reducing interest rates and tax benefit on housing loan payment. Let us understand how you can have a smart tax plan to get maximum benefit out of your housing loan.

The Income Tax Act, 1961 provides deduction for housing loan principal repayment and interest component. Though principal and interest are the components of same housing loan, conditions attached to each of these deductions are different in multiple ways.

Section 80C for Housing Loan Principal Repayment:
Deduction is available if:

  • You are an individual or a HUF
  • Loan is for purchase or construction of house property
  • Construction of property is complete, and you have received a completion certificate for the same; or you have got the possession of the property
  • Loan is availed from co-operative society, banks, NBFCs, government entity and not from individual like friend/family members
  • Amount of loan principal is actually paid

Amount of Deduction:
Maximum deductions is up to Rs.150,000 which is also a part of the various deductions allowed u/s.80C such as PPF Investment, Tax Saving Fixed Deposits, Equity Oriented Mutual Funds, National Savings Certificate, Senior Citizens Saving Scheme, etc.

Revocation of tax Benefit:
If you have claimed deduction u/s.80C, then you should avoid selling the property in less than five years from the end of financial year in which you received its possession. If you sell the property within this time limit, then you will not be eligible to claim any deduction for the principal repaid during the current year and the total amount of tax deduction already claimed in respect of earlier years shall be deemed to be your income in the year of sale of property.

Section 24(b) for Housing Loan Interest:
Deduction is available if:

  • You have received possession or construction of property is completed within 5 years from the end of the year in which loan was taken.
  • Interest on housing loan is accrued for the year, which means you are eligible for deduction even if the interest amount is not actually paid.
  • Amount is borrowed from any entity including relatives or friends.

Amount of Deduction:
Interest deduction is available up to Rs.200,000 in case of self-occupied property and without any limit for let-out property. However if the possession or construction of property is not completed within 5 years from the end of the year in which loan was taken, then deduction would be restricted to Rs.30,000.

It might happen that interest accrues on your housing loan before actually getting the possession or completion of construction. In such cases, pre-construction/pre-possession period interest can also be claimed over 5 equal instalments from the year in which construction is completed or possession is received.

The interesting point here is that deduction for principal housing loan and interest thereon is allowed per taxpayer. Thus, you can get maximum benefit by having such housing loan in joint name. Let’s say, if you get joint housing loan with your mother then both, you and your mother would be eligible for a separate deduction under these sections