Home Loan Tax Benefit: 80C, Interest and 80EE [AY 2018-19]

| 2 years ago

Home Loan

Living in own house is like a dream come true and yes, most people in our country thriving day and night to achieve their dream house.

In India, the government promotes housing scheme to its citizen in form of a low-interest home loan and through various other tax benefits.

In this article, we will cover tax benefit of home loan and deduction under section 80EE. [Summary is at the bottom]

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Repayment of a home loan through EMI contains 2 components:

  1. Principle Component
  2. Interest Component [Based on principle]

Each component has its own tax benefits.

Tax Deduction on Repayment of Principal Amount [Section 80C]

After the purchase or completion of construction, principal component is eligible for deduction under section 80C up to Rs.1,50,000/- every year. Payment of principal component before the purchase or during construction period will not be eligible for deduction (no carry forward).

This deduction is on payment basis i.e principle payment relating to past or future periods are eligible for deduction in the year of payment.

The limit of Rs.1.5 lakh is for both self-occupied and let out house property. The loan should be for purchase or construction of a residential house only. [Commercial property not covered]

If a taxpayer sells the house property within 5 years of its possession than he will be liable to pay tax on every principle amount which was claimed as the deduction in earlier years under this section. It will be taxed in the year of sale.

Example:

Mr.Sharma takes a home loan in 1st April 2017. During the year 2017-18, he paid Rs. 1,20,000 as the principal and also claimed the amount as a deduction under section 80C. On 1st May 2018, he sold the house.

Effect: Include Rs.1,20,000/- as an income in computing taxable income of Mr. Sharma for FY 2018-19 [AY 2019-20].

This deduction is not available when a loan is taken for repair, renewal or reconstructed of a house. Recommended to Read: Deduction of Tax on Purchase of Home or Property

 

Tax Deduction of Interest on Home Loan [Section 24(b)]

Unlike the principal component, a homeowner can get the deduction of interest* on a loan taken for:

  1. Purchase,
  2. Construction,
  3. Repair,
  4. Renewal,
  5. Reconstructed of a house property.

*Interest also includes processing fees and ancillary charges.

This deduction is available on accrual basis i.e allowed in the year for which such interest relates. For example, interest for FY 2017-18 will be allowed as the deduction in the same financial year even if such interest is paid in FY 2018-19.

The maximum amount of deduction under this section depends on the type of house for which a loan is taken.

There are two types of house, self-occupied and let-out. A taxpayer can claim only 1 of his property as self-occupied and the remaining house property will be considered as let-out (if any).

Self-Occupied House Property 

In case of a loan for acquisition or construction of a house, interest portion is divided into 2 periods:

Part A: Post-Construction or post-acquisition period

Part B: Pre-Construction or pre-acquisition period

The maximum deduction of interest from both part A and B is Rs.2,00,000/- only.

 

 Part A: Interest during post-construction or acquisition period 

A. Interest accrued on Loan for a period after Construction or acquisition
Purchase xx
Construction xx
Maximum deduction [24(b)]
(also includes proportionate interest relating to pre-construction)
2,00,000

For availing the above deduction, following point should be checked:

  1. Interest portion should relate to the period after purchase or completion of construction
  2. The loan should be borrowed on or after 1st April 1999 [construction may start before 01/04/1999]
  3. Acquisition or construction should be completed within 5 yearsWhile computing income for the period before FY 2016-17, this period should be considered as 3 years only , from the end of financial year in which loan is taken.

 Example: If a loan is taken on 1st December 2011, construction should be completed within 31st March 2017. [FY 2013, 2014, 2015, 2016, 2017]

 In a case where the loan is taken before 01-04-1999 or construction is completed after 5 years, the deduction of interest relating to post-construction will be Rs.30,000/- only.

 

Part B: Interest during pre-construction or acquisition period 

Pre-construction period refers to the period from the date of loan sanction till 31st March immediately prior to the date of completion of construction or acquisition.

If a loan is repaid before the completion of construction or acquisition than the pre-construction period shall be up to the date of loan repayment.

Example: Loan taken on 6th August 2014 and construction is completed on 31st December 2017. The pre-construction period is from 6th Aug 2014 to 31st March 2017. Interest paid during April 2017-December 2017 shall be considered as interest for the post-construction period.

Interest accrued during pre-construction period is allowed as deduction equally in immediate next 5 years after completion of construction or acquisition. For a particular year, this deduction will lapse if the claim is not made.

 

B. Interest accrued on Loan for a period before Construction or acquisition. (Under Construction Property)
Purchase xx
Construction xx
Total amount accrued during
Pre-construction period
Rs.400000
(assumed amount)
Deduction u/s 24(b):  Above amount is divided equally in next 5 year (1/5)
1st year 80000
2nd year 80000
3rd year 80000
4th year 80000
5th year 80000

For self-occupied house, the maximum deduction under section 24(b) is Rs.2,00,000/- only and this includes interest relating to pre and post construction periods.

Part C: Interest on loan not for purchase or construction 

For an existing(old) self-occupied house, a taxpayer can get the deduction of interest on a loan taken for repair, renewal or reconstruction up to a maximum of Rs.30,000/- [section 24(b)]

A taxpayer can use section 24(b) either for “part A + part B” or “part C” because he can declare only 1 of his house as self-occupied property.

 

Let-out Home [Rented House]

For a let-out house (not self-occupied), there is no maximum limit for deduction of interest on a home loan [Under section 24(b)]

However similar to self-occupied property, the maximum deduction of interest relating to pre-acquisition or pre-construction for a let out property shall be limited to 1/5th of the total interest amount.

If a person owns a house but lives on rent can declare his house either as self-occupied or let-out based on net tax advantages. Further, he will also be eligible for HRA or deduction of section 80GG.

 

Now, this part is easy!

Deduction under Section 80EE 

From the financial year 2016-17, a 1st-time buyer of a residential property can claim a deduction of interest on a home loan up to Rs.50,000/-. This deduction is in addition to the deductions under section 80C (Rs.1,50,000) and section 24(b).

This deduction is on an accrual basis and is available only to individuals. Further, interest already claimed under section 80EE can’t be claimed under any other sections [Like 24(b)].

In order to get this deduction following conditions should be kept in mind:

  1. The loan is sanctioned by any financial institution during 01st April 2016 to 31st March 2017.
  2. The loan amount is not more than Rs.35 lakh
  3. Value of the residential property is not more than Rs.50 lakh.
  4. On the date of loan sanction, such person should not own any residential house property.

Note:

  1. Interest on loan for construction is not eligible for deduction under section 80EE.
  2. Segregation of interest into pre and post-acquisition is not required.
  3. The loan should not be for commercial properties.

 

Summary 

Deduction under section Loan Component Maximum deduction
Self-occupied Let-out
Section 24(b)
(see part A & B or Part C)
[Decuction on accrual basis]
Interest  (i) Rs.200000 (If specific conditions satisfied)
(ii) Rs.30000 (in other case)
No limit
Section 80C
[Decuction on payment basis]
Principal Rs. 1,50,000 Rs. 1,50,000
Section 80EE
[Decuction on accrual basis]
Interest  Rs. 50,000 Rs.50,000

Suggestion

Try to buy home and home loan jointly with any other earning family members as it will provide the tax benefit to all co-owner separately with same limit of Rs.2 lakh for interest [u/s 24(b)] and Rs.1.5 lakh for principal [u/s 80C].

 Frequently Asked Questions [FAQ]

Ques 1: Mr. Arnab pays EMI for a house owned by his old age father. Can he claim the deduction of 80C, interest, and 80EE?

Answer: No, for claiming these deductions ownership is mandatory. A small portion of ownership say 1% of that house can entitle him for the deductions.

Ques 2: Mr. Mukherjee and his wife owns 50%-50% of a flat in Kolkata. Mr. Mukherjee pays 1,80,000 and his wife pays Rs.75,000 towards the home loan interest. How much interest deduction can they claim under section 24(b)?

Answer: Both Mr. Mukherjee and his wife can get the whole of the amount paid as the deduction under section 24(b). The limit of Rs.2 lakh is for each individual.

Therefore, the consolidated deduction will be Rs.2.55 lakh [1.8+0.75 lakh] 

     

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