Home Sweet Home. It is very common for many people to have a dream about their own home. But it is not possible for everyone to afford an own house. To solve this problem, people are interested in taking the home loan. Home loan is the money which is granted by bank/ financial institutions. However, there are certain terms and conditions, which are maintained by the people if they are interested in taking the home loan. In general, at the time of taking the home loan, people are very interested to know about different charges related to the loan, interest rate, repayment schedule etc. These are very important factors for a loan. But very few people know that a home loan can save their income tax also. From Principle amount to interest amount, everything of a home loan can save or reduce income tax.
Home Loan can save your income tax in following three ways:-
- Interest Paid on Home loan U/S 24(b).
- Deduction U/S 80C on repayment of Principal Amount.
- Deduction if you are a first time home buyer U/S 80EE.
Interest Paid on Home Loan
Where the Property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital i.e., loan, the amount of interest payable on such loan shall be allowed as a deduction.
This means that deduction U/S 24(b) can be availed by an assessee if the loan is taken for repair or renewal also. So, who are thinking about repairing their house by taking the loan, they can enjoy the benefit of this section.
Now the main point is “what is the amount of deduction?” Can it be any amount? No, not at all.
Following conditions must be satisfied:
i) Where the property is acquired or constructed with capital borrowed on or after 01.04.1999 and such acquisition or construction is completed within 5 years of the end of the financial year in which the capital was borrowed, then the amount of deduction shall be the actual amount of interest, or Rs 2. 00,000 whichever is lower.
ii) If the above condition is not satisfied, then the amount of deduction shall be the actual amount of interest, or Rs 30, 000 whichever is lower.
iii) In case of borrowed for repair or renewal, the amount of deduction shall be the actual amount of interest, or Rs 30, 000 whichever is lower.
Deduction on home loan interest cannot be claimed when the house is under construction. It can be claimed only after construction is finished. Interest paid during pre-construction period can be claimed as tax deduction in five equal installments starting from the year in which the construction is completed.
Deduction u/s 80C on repayment of principal amount
The total amount of EMI can be divided into two parts, a) the Principal amount and b) Interest amount. One can claim principal amount of home loan as a deduction u/s 80C. However, the maximum amount can be claimed u/s 80C is Rs 1, 50,000. Deduction under this section can be claimed on stamp duty and registration charges also.
Deduction U/S 80EE
The maximum amount of deduction can be claimed under this section is Rs 50,000. However, the following conditions must be satisfied:
- The loan must be sanctioned between 01/04/2016 to 31/03/2017
- The loan must be taken for acquisition of residential house property.
- Value of residential house property does not exceed Rs 50, 00,000.
- Amount of loan does not exceed Rs 35, 00,000.
- Assessee does not own any residential house property on the date of sanction of loan.
- This deduction is over and above the Rs 2, 00,000 limits under section 24(b) of the Income Tax Act.
- Finally, the deduction under this section can be claimed by Individual assessee only.
Practical Question & Answers
Let us discuss some practical problem about above matter:
- Mr, Avishek is an individual assessee. His total income for the assessment year 2018-19 is Rs 10,00,000 per annum. He took a loan of Rs 12,00,000 on April 2017. Total principal repayment is Rs 75,000 and total interest for the year is Rs 90,000. It is also assumed that Mr. Avishek does not own any house property at the time of taking the loan. Compute the amount of deduction available to Mr, Avishek.
Ans: First of all, for every loan, there are two parts, one is the principal amount and another is the interest amount. As per our above-mentioned discussion, an assessee can get the benefit of deduction from both this two-part. For principal amount, he can get deduction under section 80C and for interest amount he can get deduction under section 24(b).
Now, the main point is that Mr. Avishek cannot get the benefit of deduction U/S 80EE. As mentioned above the deduction under this section is over and above Rs 2 lakhs limit U/S 24(b). Here the interest amount is Rs 90,000. The entire amount is eligible for deduction U/S 24(b). Hence there is no chance for claiming deduction U/S 80EE. Hence the amount of deduction shall be:
U/S 80 C : Rs 75000 i.e.the principal amount
U/S 24(b): Rs 90000 I.e. the interest amount, and
U/S 80EE: NIL
2) If in the case of the above question, the interest amount is Rs 2, 45,000, then what will be the amount of deduction?
Ans: The maximum amount of deduction U/S 24(b) is Rs 2, 00,000. In the case of section 80EE, the amount of deduction is over and above Rs 2 lakhs limit U/S 24(b). The maximum amount of deduction is Rs 50, 000. Hence, the amount of deduction shall be
U/S 24(b): Rs 2, 00.000 and
U/S 80EE: Rs 45,000.
3)Mr. Avishek took a loan of Rs 12, 00,000 on 1/4/2013 for construction of a house. He repaid the loan on 31/3/2017. The house property was completed on 31/12/2016. Amount of accumulated total interest is Rs 3, 50,000. Determine the deduction U/S 24(b) for the previous year 2017-18( Assessment year 2018-19)
Ans: Deduction on home loan interest cannot be claimed when the house is under construction. It can be claimed only after construction is finished. Interest paid during the pre-construction period can be claimed as the tax deduction in five equal installments starting from the year in which the construction is completed.
Therefore, the amount of deduction U/S 24(b) for the previous year 2017-18 will be (Rs 3, 50,000 x 1/5) i.e. Rs 70, 000.