March 01 , 2013
Thanks to the favourable treatment income tax gives to home loans this is one loan you would be better off taking. Principal repayment and interest repayment have separate tax deductions. Both are discussed below in detail.
Income tax deduction on housing loan interest
While filing Income Tax Returns you notice that income from house property is a separate head apart from salary, capital gains etc. Every year you need to pay income tax on income from your house property. Generally income from house property is the rental income you receive on it. This is called 'annual value' of the house.
However if you have not let it out you still need to pay tax considering a notional rent. If you are occupying the house its annual value is zero. In a separate article we have covered how to calculate income from house property in detail.
Whatever the annual value of your house is, you can deduct from it the interest payable in that year on borrowing for the house for computing income from house property.
Tax deduction on home loan interest in self occupied property
The annual value of a house you are residing in is nil. From this you can still deduct the amount payable as interest on loan taken for the house. Maximum interest that can be deducted from a self occupied property is Rs 1.5 lakhs in a year.
If you own more than 1 house you can designate any of the houses as self occupied. So ideally you ought to designate the house on which you are paying the highest interest on home loan as self occupied for making best use of this rebate under section 24b. However the house must not be let out on rent in that year.
From 2013-14 an additional Rs 1 lakh has been proposed for tax deduction towards interest for first time borrowers of home loan less than Rs 25 lakhs. This additional rebate is available only on borrowing from bank or a housing finance company.
Tax deduction on home loan interest in let out properties
From the annual value of your house you can deduct the entire interest you are liable to pay in that year to arrive at income from house property, under section 24b. Interest deduction is on payable basis. This means even if you have not actually paid the interest in a particular year you must claim deduction for it in that year. It cannot be claimed in another year when you actually pay it. However interest on interest dues does not qualify for this tax rebate.
There is no restriction on the source of borrowing for tax deduction on home loan interest u/s 24b. Loans from friends or relatives also qualify for this rebate. The lender must provide certificate stating your interest repayment liability every year.
Interest on a home loan taken to pay back an earlier home loan also qualifies for tax deduction under section 24.
Since only one house property is designated as 'self occupied' and the rest are deemed to be let out, you can claim 100% income tax deduction on interest on your second home or as many homes as you own.
Income tax deduction on housing loan principal
The principal component of your home loan can be claimed for income tax deduction under section 80C. Up to Rs 1 lakh can be claimed for home loan principal and this limit is inclusive of all other deductions allowed under section 80C.
Principal deduction on home loan is applicable only when the borrowing is for constructing or buying a residential house and is from a bank, co-operative society or other housing finance company.
Tax deduction on home loan for property under construction
Interest deduction in under-construction house
Income deduction on interest of home loan under section 24b is allowed only after you acquire or finish construction of house. However if you started making loan repayment prior to this period you can still get deduction for the interest portion. Total interest payable in the previous year can be deducted over 5 years starting from the year of acquisition in equal installments. Maximum Rs 1.5 lakhs can be deducted in 5 installments in case of self occupied property if the construction/acquisition were completed within 3 years of borrowing.
Principal deduction in under-construction house
Income tax laws do not have provision for deducting any payment made as principal of home loan before construction/acquisition has been completed.
Make the most of it
For income tax computation you become owner of the house when you get possession of the house property and you can start claiming income tax deductions on both interest and principal repayment only after you become the owner of the house.
If you are wondering whether to take home loan to buy a second house property it might be a good idea to go ahead with one if you land a good property deal as you can cut down on the income from house property thorough deductions under section 24. Another interesting fact is that if it is joint home loan both spouses can avail these deductions.