Updated: Oct 4, 2020
Over the ages, Food, clothing and shelter still remain the basic necessities for human survival. Among the three, shelter or house is the only necessity which not only represents the basic need but also holds aspirational value for first time home buyers. Owning a house provides a sense of liberation, especially for those who either themselves have been longing for it or have parents who have spent most of their working live(s) dreaming to own a home. For a majority of population, earlier it used to take a lifetime of hard work and savings to be a finally able to own a house, while nearing the end of their working lives. However, the situation has changed now since multiple options are available for financing of the amount required to buy a home. Therefore, home loan becomes a means to fulfil the dreams and aspirations of millions of individuals by preponing the event of purchasing a house.
Availing a home loan from a bank or financial institution, offers multiple advantages to the prospective buyers:
Prepone the purchase of house and fulfilment of dream
Create an asset, which appreciates over time and contributes towards wealth creation
Freedom from rent.
Savings on annual tax payment.
In this write-up, we will be discussing on the tax savings offered by Home loan as per the current Govt guidelines
Home loan borrowers are eligible for tax benefits on home loans under the Income Tax Act of 1961.Benefit of tax deduction is applicable on principal repayment under section 80C, tax deduction on interest under section 24, and additional home loan interest tax benefit for first-time home buyers under section 80ee.The cumulative benefit amounts to Rs 4 lcs per annum.
These benefits offer opportunities to borrowers to save significant amount of money annually. The income tax benefits on home loan applicable for FY 20-21 are summarized as under:
Let’s go through these benefits one by one in detail and understand them:-
Tax Benefit Under Section 24(b) – Interest Paid
Under this Section, a borrower can claim tax deduction of up to Rs. 2 lakh on the interest payment of home loan for a self-occupied property. The best part of this section is that no maximum limit or capping is applicable in case the property, is not self-occupied, is rented or deemed to be rented. In such a scenario, the taxpayer can avail deduction of whole amount paid under the section 24. The property should be purchased or constructed within a period of five years from the end of the financial year in which the loan was taken.
Tax Deduction under Section 80C- Home Loan Principal Repayment
Under this section, the amount paid as the repayment of home loan principal amount, is allowed as a deduction of up to Rs. 1.5 lakh subject to below conditions
The construction of house is completed and customer is paying EMI on loan(Principal Interest Payment) and not Pre-emi (only interest payment).
It is important to note that as per section 80(5) of the income tax act Such property cannot be transferred for a minimum period of five years from the end of the year in which the possession is obtained. If such property is sold within a time period of 5 years, all deductions which were allowed as home loan tax benefit in the previous years shall be deemed as income for the year in which property is sold.
Additional Tax Deduction for First-time Home Buyers under Section 80EE
As per the provisions of this section, an additional deduction of Rs. 50,000 can be claimed by individuals who make payment of interest on home loan. This deduction shall be in addition of the deduction of Rs. 2 lakhs allowed under Section 24 and the deduction of Rs. 1.5 lakh allowed under Section 80C . The conditions to qualify for this deduction are as under :
The taxpayer should not own any other property at the time of loan application.
property against which the loan is taken should be the first property.
The value of property should not exceed Rs. 50 lakh
The home loan amount should not be more than Rs. 35 lakh
The amount of such loan should have been sanctioned to an individual between April 1, 2016 and March 31, 2017
Additional Tax Deduction on PMAY – CLSS scheme: Section 80EEA
The government has further allowed the interest deduction allowed for low-cost housing loans taken between the period April 1, 2019 and March 31, 2020. As per the Section 80EEA, a deduction of up to Rs. 1.5 lakh on the interest paid on home loan can be claimed subject to below conditions:
The stamp duty value of residential house property should not be more than Rs. 45 lakh
The borrower should not own any residential house property on the date of sanction of loan
The borrower would not be eligible to claim deduction under Section 80EE of the Income Tax Act
o Can the benefit be claimed both under section 80EE and Section 24?
This deduction is in addition to the Rs 2 lakh limit allowed under section 24. Therefore, if the conditions of both Section 24 and Section 80EE are complied, then the taxpayer can claim deduction under both the sections. The borrower should first claim benefit under Section 24 and then apply for deduction under section 80EE for residual limit.
Advantage of availing home loan in joint names
Home loan having joint applicants offers dual benefits to the borrowers:
Enhances the home loan eligibility by clubbing the income of 2 or more individuals and thereby enabling purchase of a bigger house.
Applicants availing home loan jointly can avail home loan tax benefits individually. Therefore individuals who have availed joint home loan, each can claim tax benefit of up to Rs. 1.5 lakh and Rs. 2 lakh on their home loan principal and interest, respectively. The combined tax benefit is subject to the total interest and principal repayment done annually. Similar benefit is applicable to claim additional tax benefit under Section 80EE of the Income Tax Act.
o How to Claim Home Loan Tax Benefit?
The process to claim tax benefits on a home loan is easy and simple.
Apply to your bank and financial institution for obtaining Income tax certificate/Provisional Income tax certificate/Home loan interest certificate.
The certificate should clearly mention the principal & interest repayment for the year.
The property and loan should be in the name of claimant
Calculate the total amount which needs to be claimed as a tax deduction.
The home loan interest certificate should be submitted to employer for claiming the deduction.
Self-employed borrowers should provide the documents, if query is raised by income tax authorities