Tax Benefits on Taking Home Loan

January 30 , 2013

Buying property as investment or for occupying it attracts tax rebates if it is financed through loan. Here are few things to remember.

Tax rebate for sole owner and borrower

1. Tax rebates are available for interest and principal component of home loan under two different sections of the Income Tax Act. You can reduce your income tax liability by claiming these while filing tax returns.

2. Under section 80 C you can claim up to Rs 1 lac every year on principal component of home loan paid in that year. Rs 1 lac cap includes all other deductions like those on PPF, NSC, ULIP, PF, ELSS, 5 yr FDs available under this section. Your home loan principal can be added to the other applicable investments and inserted in the cell for 80C under Chapter VI A Deductions in the relevant ITR form.

3. Initial expenses like stamp duty and registration charge can also be added to the principal component in the year the transactions occurred for rebate under 80 C. Rebate on home loan principal repayment is available only for self-occupied property. But if you have let out your house for rent and are staying in a rented property in another city due to employment you can still claim rebate on principal repayment.

4. Interest component of home loan gets deduction under section 24. Every year you can claim up to Rs 1.5 lacs for interest portion of your home loan paid in that year. This can be claimed on as many houses you have. If the house is let out it gets even better. You can claim the entire interest portion paid in a year for income tax rebate. However for computing income from house property all except one self-occupied house is considered to be let out. So effectively all the houses you own can have income tax deduction on the entire interest except one self-occupied house.

5. Interest on home loan can be deducted from any income you earn from your property. In case of self occupied property your income from house property would be negative after deducting interest from nil income. This is to be entered in the cell for Income from House Property in the relevant ITR form.

Tax rebate for home loan co-borrower

1. In case of a joint home loan all co-borrowers who are also co-owners can claim income tax rebate for their proportionate share in the loan.

2. Each co-borrower who is a co-owner can individually claim up to the limit under section 80 C for their share of principal repayment. Similarly under section 24 each can claim up to the limit corresponding to their share of interest repayment in case of self-occupied property or the entire interest corresponding to their share in case of rented property.

3. The loan split among the borrowers should be mentioned in the certificate issued by the bank or lender. This is necessary for claiming tax rebate. Usually banks split the loan in the same proportion as share in ownership.

Tax rebate for home loan taken before construction

1. The interest component of home loan taken before construction can be evenly split into 5 and added to interest of 5 consecutive years from the year construction is completed for claiming rebate under section 24.

2. However principal of home loan paid before construction cannot be claimed for deduction.

Get direction on your financial life before its too late

Click here to know more

Article Ready Reckoner Concept Procedure