Tax benefits of home loan: Now buying house shall even be more beneficial

  • I am planning to buy a house by taking home loan; whether I should buy vacant plot/ land/ under construction property or readymade flat to avail maximum tax benefit?
  • What is the quantum of the tax benefit that shall be available to me in each of the cases?

One of the major issues faced by us is high tax burden that we have to bear every year. And to reduce such burden, all of us look for some exemptions that can be availed so that we have to pay fewer taxes. Availing a house loan brings one such opportunity to reduce the tax burden.

If you also have raised a home loan recently for buying a house and are curious to know the f that are attached with payment of interest and principal amount of loan, this blog shall help you resolve your curiosity. Let us understand what are the benefits that you can avail from the loan on your property. According to provisions of income tax act, a person availing home loan can claim exemption of tax both on interest payment as well as principal repayment in his ITR.

Yes, if you are paying interest & principal amount towards a loan, you can utilize such amount to reduce your tax liability.

To gain more understanding of the provisions, let’s divide the discussion of tax benefits in two parts:

  • Tax benefits on payment of interest;
  • Tax benefits on repayment of principal amount;

A house property for which loan has been taken may either be a self occupied property or a rented property. That is to say, the person who has taken the loan shall either himself occupy the property or shall let it out on rent. So let’s analyze both the above mentioned points and understand as to how we shall be benefitted in each of the cases:

  1. Tax benefits on payment of interest; If you are paying interest on home loan, you shall be entitled to deduction as pointed below.
  • Tax benefit in case you have self-occupied property; Maximum interest of Rs. 2, 00, 000 is allowable in case loan is taken for purchase or construction of self occupied property. Such amount shall reduce to Rs. 30, 000 in case loan is taken for repair/ reconstruction of property.

Important to note: – Construction or purchase must be completed within 3 years from end of F.Y. in which loan is taken.

  • Tax benefits in case you have let out the property on rent; The entire interest amount that you pay towards the loan is available as deduction in case of rented property. Such amount shall be deducted from the rental income for the year.

Following computation to be done to calculate income from house property:

Computation Self Occupied Rented
Rental income (Net Assessable Value in case of self-occupied) NIL XXX
(- ) Property Taxes NIL XXX
Net Value NIL XXX
(-) Standard Deduction @ 30% { Net value *30% } NIL XXX
(-) interest on Home Loan XXX XXX
Income From House Property XXX XXX

In both cases, due to interest payment, there shall be a loss in “Income from house property” head which can be adjusted against the income of other heads. In case such loss is not adjusted fully, it can be carried forward for next 8 years and can be adjusted in subsequent years

2. Tax benefits on repayment of principal amount;

In both the cases whether there is self-occupied property or rented property, Principal amount re-paid is eligible to be claimed under sec 80 of the income tax act. A maximum of Rs. 1.5 lakh can be claimed under sec. 80c (Max. limit of claiming all deductions under 80c is 1.5 lakh.

YOUR QUERIES, OUR ANSWERS..!

Is Exemption available for a property which is under construction?

Till the completion of purchase or construction of a house property, no interest shall be allowed. But pre-construction interest is allowed in 5 equal installments, starting from the year in which the house is purchased or the construction is completed. It is pertinent to note that pre-construction interest is included within the overall limit of Rs. 2, 00, 000 for a self-occupied house and only a fifth can be claimed each year.

If I buy a house in co-ownership and the loan is also taken in co-ownership; what are the provisions relating to claiming of exemption?

Each co-owner shall be entitled to deduction individually; i.e. deduction of Rs. 2,00,000 can be claimed by all the co-owners in their ITR individually.

I plan to raise loan from my friend. Shall I be eligible for taxbenefit on account of interest and principal repayment?

Interest payment can be claimed u/s 24 but the principal amount can only be claimed if loan has been taken from notified institutions and banks. Hence you shall not be entitled to claim re-payment of principal amount as deduction

I had taken a loan to buy house property and I am paying interest and principal in relation to such loan. I am a salaried employee as well and want to claim HRA in my ITR. Am I eligible to claim interest deduction as well as HRA?

If you have a taken a loan and bought house property but you are still living in rented accommodation, you shall be entitled to claim interest repayment, principal repayment as well as HRA in your return. But if you have self occupied the said property, then you can’t claim HRA.

Still left with unresolved queries? Or require help to calculate the income from house property? Don’t worry; write your queries below in comments or mail us at [email protected] . We shall get back to you shortly with the appropriate answers to satisfy you.

CA Abhishek Soni

By CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.

3 comments

  1. If i buy a house with my friend as one of the co-owners and we are staying in the same city but on rental with our respective families. Will we be eligible for HRA exemption as well as home loan tax exemption?

    1. Dear Mr. Dhiraj,

      Thanks for your query. Interestingly, you can claim both HRA and House loan interest at the same time but only if valid grounds for claiming both exists.

      The detailed explanation is as follows:

      As per the decision of Hon’ble High Court of Delhi in CIT v. Mr. Justice Avadh Behari Rohtagi [1986] 157 ITR 441 and also some other similar judicial pronouncement, if you are staying in a rented house, then you are eligible to claim HRA tax exemption. Simultaneously, if you have taken a house loan then you can claim the house loan benefits too. If you have bought a house with the help of a home loan and live in another house on rent, you can claim tax benefit for both. But if the house you bought and the house you live in are in the same city, you should have a genuine reason for not living in the house that you own. The reasons could be that the house you own is too far from your workplace, or the commute is very difficult. This claim can be the subject matter of litigation if the department is not satisfied with your contentions. For customised opinion and safe tax planning, you can connect with us at [email protected] or at +09660996655.

  2. Nice post. It’s really a nice and helpful piece of info. I’m happy that you shared this helpful information with us. Please keep us up to date like this. Thanks
    for sharing.

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