Against the backdrop of rising property prices & interest rates, borrowers need to be aware of the tax breaks offered by home loans. Tax breaks can be availed on both components of the loan installment — principal and interest.
Tax benefits, in respect of repayment of the principal amount and interest payments, are provided under Sections 80C and 24 of the Income tax Act, 1961, respectively. For claiming a deduction of the principal amount, the loan can be taken for purchase or construction of the house property and from specified lenders, such as central or state government or any bank (including a cooperative bank).
Further, deduction for interest can be claimed not only for loans taken for purchase or construction of house property, but also for repair, renewal or reconstruction of the existing house property.
Let us illustrate. Abhishek Sen takes a bank loan of Rs 18 lakh for construction of residential house property (to be used for self-occupation) on November 1, 2006. For the sake of simplicity, let us assume that he is required to repay this loan in monthly installments of Rs 25,000 (comprising Rs 15,000 of principal amount and Rs 10,000 of interest) over a period of 10 years. The construction of the property is to be completed on September 30, 2009.
PRINCIPAL
The borrower can claim a deduction of the principal sum and stamp duty, registration fee and other specified expenses incurred for the purpose of transfer of the house property to him. The deduction can be availed starting from the financial year in which the house property is purchased or the construction thereof is completed up to a maximum limit of Rs 1,00,000 per year.
Therefore, from financial year 2009-10 onwards, Mr Sen can claim deduction for the actual principal payment or Rs 1,00,000 per year, whichever is lower.
INTEREST
The borrower can also claim a deduction for the interest due on the housing loan, starting from the financial year in which the purchase or construction or the repair, renovation etc take place.
In case of self-occupied property, the borrower can claim interest up to Rs 1,50,000 per year on loan taken on or after April 1, 1999, for acquisition or construction of the property, provided the acquisition or construction is completed within three years from the end of the financial year in which the loan was taken. For loans taken before April 1, 1999, the deduction is Rs 30,000 per year.
In case of let out property, the borrower can claim interest on actual basis, as no maximum limit is prescribed.
Further, interest incurred for the pre-acquisition or pre-construction period, can be claimed equally over a period of five financial years, starting from the year in which the property is acquired or construction is completed. However, the total interest deduction cannot exceed Rs 1,50,000 a year.
In Mr Sen’s case, deduction for the interest of Rs 1,20,000 a year can be claimed from FY10 onwards. The interest for the pre-construction period (November 1, 2006 to March 31, 2009) being Rs 2,90,000 (ie, Rs 10,000 per month x 29 months) can be claimed as a deduction in five equal instalments of Rs 58,000 per year from financial year 2009-10 onwards, subject to aggregate limit of Rs 1,50,000 a year.
HOW TO CLAIM
The above deductions can be claimed by the borrower on the basis of a certificate issued by the lending institution stating the principal amount paid and the interest amount due for that particular financial year.
OTHER ASPECTS
A few other points which a borrower should keep in mind in the context of tax benefits are as follows:
Sale of property: If the house property is sold before five years from the end of the financial year, in which possession of such property is obtained, the deduction allowable for principal amount will no longer be available and deduction allowed in earlier years for the principal sums will be considered as the borrower’s income of the financial year in which the property is sold.
Pre-payment of loan: In case of complete or partial pre-payment of loan, the above provisions would continue to apply up to the year the loan is alive. Once the loan is entirely paid, no tax benefits can be claimed in subsequent years.
Property under construction: Principal amount repaid before construction is not eligible for deduction. However, pre-construction interest can be claimed in the period after completion of construction.
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