Income tax benefits on housing loan – Applicable to an Individual

With a housing loan, you can reduce your tax liability by taking income tax benefits that are available to you under different sections of income tax act. In this article we will let you know different income tax benefits that you can get by taking a housing loan.

Housing loan EMI has two components. One is your principal amount and the other component is interest charged on the loan.

Income tax benefits can be taken on you housing loan’s principal and interest amount that you paid to your bank every year. To claim such benefits the primary condition is that you should borrow the money and both interest and principle should be on the borrowed capital.

Income tax benefits on housing loan – Applicable to an Individual

Income tax benefits on Principal Amount

Section 80C of income tax act allows you to claim deduction up to an amount of Rs. 1 lakh for investing in various investment schemes and options. One of those options is taking a housing loan.

If you have taken a housing loan for purchase or construction of a residential house property then under section 80C you can include payments towards principal amount as an eligible amount for a tax deduction of up to Rs.1 lakh i.e. along with PPF, life Insurance and other deductions you can claim your payments towards principal amount as a deduction under section 80C.

However, if the housing loan is for renovation or for additions or repairs for an existing house then principal payments will not be eligible for tax deduction.

If the house for which you have claimed income tax deduction under section 80C has been sold within 5 years from the end of the year in which possession has been taken then all such deductions that are allowed earlier under section 80C will be withdrawn and will be treated as your income for the year in which you have sold the house property. So, if you are planning to sell it then our suggestion is to wait for 5 years and then sell it to get tax benefits.

Income tax benefits for Interest Payments

Section 24 of IT act deals with income tax benefits on interest payments of housing loan. As per this section, interest payable on housing loan taken for the purpose to buy or construct a house is eligible for taking income tax benefit.

Even if loan taken for repair or reconstruction of an existing house property is eligible for income tax benefits under this section which was not allowed in section 80C (i.e. income tax benefits on principal payments of housing loan).

If the house for which you have taken the loan is a let out property then the whole amount of interest payable or paid can be claimed as income tax deduction. In case of self occupied house property, this deduction will be restricted to Rs. 1.5 lakhs per annum. You can claim income tax benefits under section 24 only after taking possession of the house.

For the under construction period you can accumulate the interest portion for 5 years and then from the year of possession you can claim income tax deductions in 5 equal installments. This is in addition to the current year’s interest paid or payable for the financial year after taking possession. After claiming pre-construction period interest for 5 years you will be claiming only the current year interest.

Additional income tax deduction of Rs. 1, 00,000 can be claimed under section 80EE of income tax act if the value of your residential house property does not exceed Rs.40 lakhs and the loan taken for that does not exceed Rs.25 lakhs. This particular deduction is applicable for the assessment year 2014-2015 only if loan has been sanctioned between the 1/4/2013 and 31/3/2014. In addition to that the assessee should also not be having any other residential house property as on the date of sanction of housing loan i.e. applicable to first time home buyer.

To claim income tax benefits on interest portion you do not have any restriction on selling of house property i.e. if you are selling the house within 5 years from the end of the year in which you have taken possession then your earlier deductions on payment of interest will not be taxed.

To claim such income tax benefits you are required to produce a certificate from the bank specifying interest and principle amount paid or payable for the financial year. If you are an employee then it’s required to furnish the certificate to your employer or else you can keep it with yourself to produce it to income tax officer if asked for.

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