TAX BENEFITS OF HOME LOANS IN INDIA

The government of India incentivizes home purchases by allowing home buyers to avail income tax deductions on the principal and interest paid by them on home loans. The tax benefits offered are allowed through Section 80C and Section 24 of the Income tax Act. Additionally, to boost affordable housing, a further interest benefit is allowed to first time home-buyers u/s 80EE and 80EEA where applicable.

The tax deductions allowed under each section are per person and not per property. This means in case of joint home loans, each person repaying the loan would be eligible to claim the whole amount separately. Moreover, the benefits under Section 80C, Section 24 are available even if the assesse is staying on rent and is claiming tax benefit of HRA allowance.

It is important to note here that the Union Budget 2020 has introduced a new tax system which provides taxpayers (individuals and HUFs) an option to choose between two alternative tax structures:

1) Existing Income Tax Regime with tax slabs, rates, deductions and exemptions similar to those applicable in FY 2019-20.

2) New Income Tax Regime with lower tax rates and new tax slabs but extremely limited options for deductions and exemptions.

Starting financial year FY 2020-21 (AY 2021-22), taxpayers may opt for either of the above mentioned tax regimes for determining their tax liability and filing their tax returns. Readers must however carefully note that the deductions as mentioned here u/s 24, 80C, 80EE and 80EEA are only available to taxpayers who choose the existing tax regime . None of these deductions are available under the new tax regime except a partial deduction u/s 24 for let out house property as highlighted below.

Further, the quantum of deductions and conditions as detailed below for Section 80C and Section 24 are exactly the same for FY 2018-19, FY 2019-20 as well as the choice of existing tax regime in FY 20-21.

SECTION 80C: INCOME TAX BENEFIT ON HOME LOAN (Principal amount)

Repayment of principal amount of home loans by an individual/HUF is allowed as tax deduction under Section 80C:

I. Maximum tax deduction allowed under Section 80C is Rs 1,50,000.

II. The deduction for principal payment of home loan is part of the total deduction allowed under Section 80C and includes amount invested under PPF Account, Tax Saving FD's, Equity Linked Saving Schemes, National Saving Certificates etc.

III. The amount paid as stamp duty and registration fees is also allowed as tax deduction under Section 80C even if assessee has not taken a home loan.

Conditions for Availing Home Loan Tax Benefit under Section 80C

Available on payment basis irrespective of year for which payment has been made. This means that a payment made during a particular financial year is allowed to be deducted for that financial year only irrespective of when it accrues.
Available only after construction is complete and completion certificate has been obtained (no deduction is allowed for any principal repayment if any made during the construction period).
Reversal of Tax Benefit: in case the property is sold or transferred within five years of the financial year in which possession is obtained, then the deduction under 80C shall be reversed. The aggregate amount of tax deduction already claimed in previous years shall be deemed to be the income of the assessee in the year in which the property is sold and the assessee shall be liable to pay tax on such income.

NOTE: deduction of principal repayment u/s 80C is not available in the new tax regime

SECTION 24: INCOME TAX BENEFIT ON HOME LOAN (Interest Amount)

Payment of interest on home loans is allowed as deduction under Section 24.

I. For Self Occupied Property: maximum deduction allowed under Section 24 is Rs 2,00,000 for self occupied property.

II. For Let Out Property (not self occupied):

a) Standard deduction for repairs, insurance, electricity, water supply etc. is allowed at the rate of 30% of net annual value (rent minus municipal taxes). This deduction is available irrespective of actual expenditure incurred.

b) Deduction of Interest: no limit is defined if the home loan is taken for a property which is not self occupied. The taxpayer can take tax deduction for the whole interest amount. However, starting FY 17-18, the maximum loss for Income from House Property if any after deduction of interest is capped at Rs 2 lakhs annually as explained below.

Tax on Income from Property India: Section 24: Tax Deduction of Home Loan Interest

The taxable income from house property (net of deductions) is added to the assessee's gross annual income and taxed as per the applicable income tax slab. In case, the taxable income from house property is negative, the loss (up to Rs 2 lakhs) is allowed to be set-off against income from other heads in the given financial year. If the loss cannot be set off against other income heads in the given financial year or where the loss is greater than Rs 2 lakhs, the remaining loss can be carried forward to future years and set off against income from house property or other income heads as applicable for the next 8 years.

NOTE: the new tax regime does not allow interest deduction u/s 24 for self-occupied house property. However, for let-out house property, once can claim standard deduction as well as interest deduction up to the net annual value (gross rent - municipal taxes) even in the new tax regime. Put simply, the new tax regime allows deductions u/s section 24 for let out house property but does not allow the loss to be set-off against income from other income heads in the given financial year. Also, there is no provision for loss to be carried forward to future years.

Conditions for Availing Home Loan Tax Benefit under Section 24

Available on payable basis. This means deduction is allowed on the year in which it accrues irrespective of year on which it has been paid.
For self occupied property, if the property is not constructed/ acquired within five years of purchase of the end of financial year in which loan is take, the interest benefit in this case is reduced from Rs 2,00,000 to Rs 30,000.
For not self occupied property, there is no limit on the amount available for deduction irrespective of acquisition period.
No tax deduction is allowed to be claimed during the construction period:

(i) If loan is taken for repair/renewal/reconstruction, no deduction is allowed for interest paid before completion.

(ii) If loan is for purchase/construction, the aggregate interest paid during construction shall be allowed as deduction in five successive financial years starting from the year in which construction is completed.

SECTION 80EE: INCOME TAX BENEFIT ON HOME LOAN for FIRST TIME BUYERS (Interest Amount)

Section 80EE allows for an additional annual deduction of Rs 50,000 on the interest paid on home loans by first time buyers. This is over and above the deduction available under Section 24 and Section 80C. Section 80EE is applicable for both self-occupied and let-out house property.

Conditions

Value of the property is less than Rs 50 lakhs and value of the loan is less than Rs 35 Lakhs.
The loan is taken from a financial institution or housing finance company for purchasing a residential house property.
The loan is sanctioned between April 1, 2016 and March 31, 2017.
The taxpayer does not own any other residential house property on the day of sanction of loan.
This benefit is only available to individuals, both residents and NRIs (not HUFs or AOPs).

NOTE: deduction u/s 80EE is not available under the new tax regime.

SECTION 80EEA: INCOME TAX BENEFIT ON HOME LOAN for FIRST TIME BUYERS (Interest Amount)

Introduced in union budget 2019, section 80EEA allows an annual interest deduction of Rs 1,50,000 on home loans taken by first time home-buyers. This is over and above the interest deduction available u/s 24. Therefore, taxpayers can avail a total interest deduction of Rs 3.5 lakhs on home loans if they meet the conditions of section 80EEA. Benefit u/s 80EEA is available for both self-occupied and let-out house property.

Conditions

Stamp Duty value of the house property should be Rs 45 lakhs or less.
The loan is taken from a financial institution or housing finance company for purchasing a residential house property.
The loan is sanctioned between April 1, 2019 and March 31, 2020. Union budget 2020 has extended this benefit for an year and would thus also include loans sanctioned between April 1 2020 to March 31, 2021.
The taxpayer does not own any other residential house property of the day of sanction of loan.
This benefit is only available to individuals, both residents and NRIs (not HUFs or AOPs).
The individual taxpayer is not claiming any tax deduction under section 80EE.
The carpet area of the house property does not exceed 60 Sq Mts (645 Sq Ft) if situated in a metropolitan city or 90 Sq Mts (968 Sq Ft) if situated in any other city or town.