Tax benefits on home loans
Owning a home is a dream that every person has. Nowadays the trend is owning a home by applying home loans for either buying a new home, construction, reconstruction or renovation of a property. Apart from knowing your credit score, choosing the best loan with best interest rates, it is also important to know the tax benefits a person gets on home loans.
This article is for people who are looking to buy a property – be it first-time buyer or additional property owners, gives an account of the tax benefits you can get for your home loans.
Tax benefits for home loans are segregated into 3 types.
1. Tax deduction on home loan interest under section 24
2. Tax deduction on principle paid in home loan under section 80C
3. Tax deduction for first time home buyers under section 80EE
Tax deductions on home loan under sec 24
Any EMI will consist of two parts your principal repayment and interest. In the initial stages of repayment, the interest will be more and at the final stages, the principal will be more. There are 2 types of deductions available under sec 24
1. Standard deduction of 30% of annual value
The standard deduction of 30% of annual value is the deduction towards repairs, rent collection, etc. irrespective of the actual expenditure incurred. It is calculated as
Net Annual Value(NAV) = Gross Annual Value(GAV) – Municipal taxes.
This will be Nil in the case of self-occupied property.
This gross annual value is your rent received or Fair Market Value or Municipal Valuation. In most cases, it will be rent received.
2. Rent paid on Interest
Condition |
Tax benefit |
First home – self-occupied |
· Maximum deductions for interest paid is Rs.2 lacs (Rs.3 lacs for senior citizens) if house construction completed within 5 years from the end of the financial year in which loan is taken · If the construction is not completed within 5 years then the tax exemption is only Rs.30,000 |
Rented or deemed to be rented (Vacant property) |
· For the current assessment year 2017-18 the actual interest paid can be set off from income with no upper limit · From the next assessment year 2018-19 the exemption is the lower of the following 1. Maximum limit for interest paid is Rs.2 lacs (or) 2. Actual interest paid on all properties by a tax payer |
Property under construction |
The interest can be claimed proportionally in 5 financial years post completion of property or during handing over of property with a completion certificate as proof within the annual limit of Rs.2 lacs. |
Tax deduction on principle paid in home loan section 80C
This tax deduction is on the principal part of your EMI. The maximum deduction allowed under section 80C is Rs. 1,50,000(Rs. 2,00,000 for senior citizens). This section includes the funds used for PPF Account, Tax Saving Fixed Deposits, Equity Oriented Mutual funds, National Savings Certificate, Senior Citizens Saving Scheme, etc. These deductions are available only on payment basis.
Deductions for stamp duty and registration fee I also allowed on section 80C. This can be claimed whether the assessee has applied for a loan or not.
Tax deduction for first time home buyers under section 80EE
This is only available for first time home buyers. The additional exemption of Rs. 50,000 is given for interest paid for loans up to Rs. 35 lacs for homes costing a maximum of Rs. 50 lacs.
Conclusion
Overall from the financial year 2018-19 the deductibles are going to be low. It is best to plan your property purchase with the following tips in mind
• Get the loan in the 1st quarter i.e. January to March so that you can claim the deductions for registration and stamp duty with the previous year and the loan from the next financial year.
• Joint loans with your spouse or parents can help the both of you bear the loan as well as obtain the tax benefits.
• In the case of under construction, the property makes sure to check the track record of the developer to be certain the project will be completed as promised (maximum of 5 yr.) to make sure you don't lose on your deductions.
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