Buying a home is every individual’s dream and saving some income tax parallely give you one more reason to buy your dream home. While discussing tax saving on home loan let’s divide the repayment of home loan in two parts:
Save tax on principal of home loan (Section 80C)
Section 80C of Income Tax allows a maximum deduction of Rs 1,50,000 on repayment of principal of home loan. Principal of Home Loan is one of the instruments along with Public Provident Fund, Employee Provident Fund, National Pension Scheme, Equity linked Mutual Fund etc which come under 80C and total of these can get a max deduction of Rs 1,50,000.
The amount paid as Registration Fees and Stamp Duty for the property is also allowed for tax deduction under 80C even if the Assessee has not taken home loan. The tax deduction in 80C is on payment basis hence the payment made in that year would only count for tax deduction.
Save tax on interest of home loan (Section 24)
Income Tax Section 24 allows for a maximum deduction of Rs 2,00,000 accrued as interest towards a home loan for a self occupied property. In case the assessee has let out (rented out) the property he is eligible for deduction of the entire interest paid (no maximum cap) towards home loan. Here income accrued from rent would be eligible for income tax. If the property is vacant it is considered self occupied.
Tax deduction under Section 24 is only applicable on constructed property. Hence if the loan is taken on an under construction property this tax benefit is not applicable until the possession of the property is received. However the interest accrued during the period of construction can be claimed across a period of 5 years starting from the year of possession.
For eg Mr X purchased an under construction property with the help of home loan of Rs 20,00,000 in year 2012 and gets possession in 2014. Assuming the interest accrued for these 2 years is Rs 2 lacs, this can be claimed for tax deduction in 5 years ( i.e Rs 40, 000 per year) starting from FY 2014-15
Also this limit of max tax deduction of Rs 2,00,000 on self occupied property is reduced to Rs 30,000 in case the property is not acquired within 3 years from the end of financial year when the loan was taken. In budget 2016 for FY 2016-17 onwards, this period has been extended to 5 years from 3 years.
Impact of Budget 2016 (applicable from FY 2016-17)
a) Additional Tax deduction of Rs 50,000 for first time home buyers : In Budget 2016, the finance minister has reintroduced Section 80EE wherein taxpayers get an opportunity to get tax deduction of additional Rs 50,000 over and above Rs 2,00,000 through Section 24 and Rs 1,50,000 through Section 80C on interest paid towards home loan. This incentive is applicable to taxpayers only if they meet the below conditions.
The home loan is towards the first home purchased by the tax payer.
The value of the property purchased is not more than Rs 50 lacs and amount of loan taken is less than Rs 35 lacs.
The home loan is taken within financial year 2016-17
b) Possession period raised to 5 years to avail tax benefit on home loan : Section 24 of Income tax allows a taxpayer to get a max tax deduction of Rs 2 lac towards interest paid if the possession of the under construction property is received within 3 years from sanctioning of home loan. In this Budget 2016 this period has been raised to 5 years , thus reducing the impact of delayed construction on home buyers.
The taxpayer will be required to show the statement provided by the lender showing the repayment for the year as well as interest and principal components of the same.