Home Loan Tax Benefit – Guide to Tax Benefit on Home Loan for 2017-18

Do you know a home loan can help you in real wealth creation? It not only helps you in buying your dream home at today’s price but also helps you in saving lakhs of rupees through home loan tax benefit. A home loan is the best tool to cut down your tax liability drastically. You can claim tax benefit on home loan on principal amount under Section 80 C and on interest amount under Section 24 of Income Tax Act 1961.

Tax benefits that you can claim on your housing loan depend on various factors such as – whether the property is under-construction or ready to move, whether it is you first home or second home, whether it is self-occupied or rented out etc.

Following topics are covered in this Home Loan Tax Benefit Guide 2017-18:

  • Home Loan Tax Benefit Summary – Tax deduction Limits
  • Highlights of Home Loan Tax Benefit – Principal and Interest
  • How to maximize tax benefits on Home Loan – Joint Home Loan and HRA with Home Loan.

Home Loan Tax Benefit – Summary

First Home – Self Occupied

Tax benefit on home loan for your first home which you are occupying yourself:

Principal Amount – upto Rs. 1,50,000 (Rs. 2,00,000 for senior citizens).

Interest Amount – upto Rs. 2,00,000 (Rs.3,00,000 for senior citizens) if the house is completed within 3 years from the end of the financial year in which the loan is taken, else Rs. 30,000.

First Home – Rented/ Vacant

Tax benefit on home loan for your first home which you have either rented out or is lying vacant:

Principal Amount – upto Rs. 1,50,000 (Rs. 2,00,000 for senior citizens) if staying in a different city for work.

Interest Amount – On entire interest amount without any limit.

Second Home

Tax benefits on home loan for your second home which you have either rented out or lying vacant:

Principal Amount – No Exemption.

Interest Amount – On entire interest amount without any limit.

Under Construction House

Tax benefits on home loan for your under construction property:

Principal Amount – No Exemption.

Interest Amount – No exemption during construction period. However, you can claim total interest paid during construction in equal parts in five financial years post completion of your house.

home-loan-tax-benefit-on-home-loan

Highlights of Home Loan Tax Benefit

Tax Benefit on Home Loan Principal Amount (under section 80C)

  • Principal amount tax exemption of upto Rs. 1.5 lakhs (Rs. 2 lakhs for senior citizens) can be clubbed under the overall tax saving limit under section 80C of IT Act.
  • Home loan principal deduction is available only for purchase or construction of residential property.
  • Principal deduction available for only self-occupied home.
  • Amount paid towards Registration Charges and Stamp Duty can also be claimed under section 80C, even if you have not taken loan for these charges.
  • Principal deduction not available for under construction property. Deduction available only after the construction is complete and completion certificate (CC)/ possession certificate has been received.
  • Partial or full repayment amount of home loan can also be claimed as principal amount deduction, subject to maximum limit.
  • Tax deduction under section 80C is available only on payment basis i.e. you can claim principal amount deduction only on the actual amount paid during the financial year.
  • Caution – In case, you sell your house before the expiry of 5 years from the end of Financial Year in which you received possession and if you have claimed tax deduction under section 80C, then all tax benefits that you received will be reversed. The total tax deduction amount that you claimed in previous years shall be deemed as your income of the financial year in which you sold the property and you will be liable to pay tax on such income.

Tax Benefit on Home Loan Interest Amount (under section 24)

  • In case of self-occupied property, maximum amount of interest deduction available is Rs. 2 lakhs (Rs. 3 lakhs for senior citizens). If the property is not completed within 3 years from the end of financial year in which the loan is taken, then interest deduction would be reduced from Rs. 2 lakhs to Rs. 30,000 only.
  • In case you are not occupying the house yourself, you can claim deduction on the entire interest amount. But please note that you will have to add rental income to your income. Even if the house is lying vacant, you have to take average rental value (deemed rent) for a similar property.
  • In case you are not self-occupying your house because of your employment, business or profession for which you have to reside at a place not belonging to you, then the amount of interest deduction under section 24 will be Rs. 2 lakhs only.
  • Interest deduction under section 24 is available on accrual basis i.e you can claim deduction on the accrued interest amount in the financial year even if no payment has been made during the year.
  • In case of rented or vacant property, if the loss from property due to interest (after adjusting for rent & standard 30% maintenance expenses) cannot be set-off in a given year, the same can be carried forward for upto 8 years to be adjusted against income arising from house property for next 8 financial years.
  • Home loan interest deduction is available for purchase, construction, renewal and repair of a residential property.

How to Maximize Tax Benefits on Home Loan

Joint Home Loan

In case of joint home loan, co-applicants can claim both principal and interest deductions separately. For eg. if husband and wife are co-applicants, both can claim principal amount deduction of Rs. 1.5 lakhs each and interest deduction of Rs. 2 lakhs each in case of self-occupied property.

HRA and Home Loan (combined benefit)

If you are living in a rented premise and taking tax deduction on HRA, even then you can claim home loan tax benefit for principal amount under section 80C and for interest amount under section 24.

Conclusion

To claim tax deductions on your home loan, you have to furnish principal-interest statement provided by your lender indicating the amount paid/ payable towards principal and interest.

A home loan is the ultimate tool for claiming tax deductions. By using this one tool effectively, you can reduce your tax liability drastically. For instance, you can take a joint home loan along with your spouse, parents, brother or sister and co-applicants can claim tax benefits separately. If you are living with your parents you can pay rent to your parents and rent out your own house. This way you can claim both HRA exemption and home loan tax benefit. Similarly, there are many possibilities. Now that you know how to get and maximize tax benefit on home loan, all you have to do is to implement a strategy for your situation.

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