Given the high property prices in metros, on an average an apartment
having two bedrooms, hall, and kitchen of 1,200 sq. ft in an ordinary
location will cost at least Rs.60 lake or Rs.5,000
per sq. ft and or more. So, to buy such a house, most people take the
help of a home loan, which usually forms 70-80% of the apartment’s
value. This is probably the biggest loan that a person will ever take;
thankfully, the related tax breaks are also significant. For example, a
person servicing a home loan can claim deduction against principal
repayment as well as against payment of interest. For investors, this
enhances their profit margins. “Taking a home loan for investing in a
residential property can significantly affect the buying decision,” said Amity Maharishi, managing partner, Shook Marrakesh and Associates, a
chartered accountancy firm. Take a closer look at your home loan’s tax
benefits.
Deduction on repayment
The equated monthly instalment (EMI) that you pay has two components,
principal and interest. Both qualify for tax deduction under two
separate sections of the Income-tax Act, 1961. Principal repayment can
be claimed as deduction under section 80C of the Act, whereas interest
under section 24(b).
Various other investments and expenses qualify for deduction under section 80C, which has an upper limit of Rs.1.5
lakh. However, section 24(b) provides exclusive deduction against
interest payment on home loan. In this, you can claim deduction for
interest payment on borrowed capital for the purpose of purchase,
construction, repair, renewal or reconstruction of the house property.
If home loan is taken for purchase or construction of a house, the
exemption limit if the house is self-occupied is capped up to Rs.2 lakh, but there is no cap if the house is let out.
Take a joint home loan
Often borrowers take a joint home loan to enhance the loan
eligibility. This is usually done along with spouse, parents, or in
certain cases, with siblings. The tax benefit can be claimed by all the
borrowers individually, provided they are co-owners of that property
too. “When a property is purchased jointly, and the loan is co-borrowed,
the deduction of Rs.2 lakh and deduction under section 80C (maximum Rs.1.5
lakh) is allowed to both the co-owners cum co-borrowers in the ratio of
their ownership,” said Archit Gupta, chief executive officer and
co-founder, www.cleartax.in. If you buy a property along with your
spouse and both of you share equal rights over the property, you both
are eligible to claim deduction equally. So, if the total payment in a
year towards home loan is Rs.6 lakh, with Rs.1 lakh as principal and Rs.5 lakh as interest, both the borrowers can claim Rs.50,000 each under section 80C (against principal) and Rs.2 lakh each under section 24(b), if it’s a self-occupied house, or Rs.2.5 lakh each if it’s a let-out property.
Things to remember
You can only claim tax benefit on repayment of home loans once the
property is complete. If you buy an under-construction property, you are
not allowed to claim the deduction till the time the property is fully
completed and you get possession.
“(But) pre-construction interest can be claimed in five equal
instalments starting from the year in which construction is completed
(within the overall limit mentioned above),” said Gupta. For instance,
if you have paid Rs.5 lakh as interest on home loan during the construction period, you can claim Rs.1 lakh (one-fifth of Rs.5 lakh) each year, after you get possession of the house.
In case of a joint loan, typically lenders insist on borrowers
opening a joint bank account to pay EMIs. Make sure each co-borrower
contributes according to her respective share in the joint account. It
helps to provide proof of contribution or payment to the taxman in case
of scrutiny.
A home loan is a big liability, but it also offers substantial tax
breaks. Understand these carefully so that you can make the best of the
situation.
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