Benefits on Home Loans
As the Indian real
estate market makes an upward swing, and investors opt
for housing finance
or home loans, tax benefits obtained from them is a lucrative
option. Customers availing of Home
Loans can claim a certain portion of the interest and
principal that they pay towards the loan installments for
reducing tax liability. Resident Indians are eligible for
certain tax benefits on principal and interest components
of a loan under the Income Tax Act, 1961. Moreover, an added
tax benefits under Sec 80 C on repayment of principal amount
up to Rs. 1,00,000 p.a. can be availed that can further reduce
your tax liability by about Rs. 30,000 p.a.
Tax benefits can be claimed on both the principal and interest
components of the home loan as per the Income Tax Act, 1961.
These deductions are available to assesses, who have taken
a loan to either buy or build a house, under Section 24(b).
Interest on borrowed capital is deductible up to Rs 150,000
if the following conditions are satisfied:
- Capital is borrowed on or after April 1, 1999 for acquiring
or constructing a property.
- The acquisition/construction should be completed within
3 years from the end of the financial year in which capital
- The person, extending the loan, certifies that such interest
is payable in respect of the amount advanced for acquisition
or construction of the house
- A loan for refinance of the principle amount outstanding
under an earlier loan taken for such acquisition or construction.
If the conditions stated above are not fulfilled, then the
interest on borrowed capital is deductible up to Rs 30,000
though the following conditions have to be satisfied:
- Capital is borrowed before April 1, 1999 for purchase,
construction, reconstruction repairs or renewal of a house
- Capital should be borrowed on or after April 1, 1999 for
reconstruction, repairs or renewals of a house property.
- If the capital is borrowed on or after April 1, 1999,
but construction is not completed within 3 years from the
end of the year, in which capital is borrowed.
In addition to the above, principal repayment of the loan/capital
borrowed is eligible for a deduction of up to Rs 100,000 under
Section 80C from assessment year 2006-07.
Terms and conditions for availing Tax benefits on
- Tax deductions can be claimed on housing loan interest
payments, subject to an upper limit of Rs 150,000 for a
financial year. Interest on the fresh loan can be claimed
as a deduction, subject o the stated upper limit.
- An additional loan for extension/addition to the same
house and the person's deductions on the existing loan are
less than Rs 150,000; he can claim further benefits from
the additional loan taken, subject to the upper limit of
Rs 150,000 for a financial year.
- Tax benefits under Section 24 and deduction under section
80C of the Income Tax Act can be claimed only when the payment
is made. If a person fails to make EMI payments, he cannot
claim tax benefits for the same.
- According to the Income Tax Act, only the person who has
taken the loan can claim tax rebates.
- The interest on home loans taken for repairs, renewals
or reconstruction, also qualifies for the deduction of Rs
- A husband and wife, both of whom are tax-payers with independent
income sources, get tax deduction benefits, with respect
to the same housing loan; to the extent of the amount of
loan taken in their own respective name.
- If a person buys a house and sells it within the same
year/after 3 years, and if any profit is made, then a capital
gains tax liability arises on the same for which the individual
is liable to pay short-term capital gains tax since the
sale took place in the same year. But, if the sale had taken
place after 3 years, then a long-term capital gains tax
liability would have arisen.
- If it is proved that the home loan is simply an arrangement
between the loan-seeker and the builder or with a third
party for the purpose of claiming tax benefits, then tax
benefits will not be allowed and benefits, previously claimed,
will be clubbed to the income and taxed accordingly.
- Tax benefits on interest on housing
loans are allowable only for the original loan and for
a second loan taken to repay the first loan and not for
subsequent loans. This means that if you have already availed
of one loan to refinance the original loan and want to now
avail a third loan to refinance the second loan, tax rebate
on interest payments will not be permissible. This is because
the Section 24 (1) only talks of the second loan and not
of subsequent loans. Even if you take the second loan at
a rate of interest higher than the original loan, you will
be eligible for a tax rebate on the second loan.