Meaning of House Property :

 

House property consists of any building or land appurtenant thereto of which the assessee is the owner. The appurtenant lands may be in the form of a courtyard or compound forming part of the building. But such land is to be distinguished from an open plot of land, which is not charged under this head but under the head “Income from Other sources” or “Business Income‟, as the case may be. Besides, “house property” includes flats, shops, office space, factory sheds, agricultural land and farm houses. Further, house property includes all type of house properties, i.e., residential houses, go-downs, cinema building, workshop building, hotel building, etc. Income Tax Benefits from Home Loan can also be derived.

 

Buying a house property on a loan comes with multiple tax benefits. These deductions not only reduce the tax outgo but also help in managing the cash flows better. To explain the Tax Benefit on Home Loan, we would be dividing the Repayment of Home Loan into 2 components:-

 

1. Repayment of the Principal Amount of Home loan, and
2. Repayment of the Interest on Home Loan

As the repayment of loan comprises of two different components (as shown above), the tax benefit on home loan is governed and claimed by different sections of the Income Tax Act, 1961 while filing the Income Tax Return.

 

Section 80C: Tax benefit on Home Loan (Principal Amount) :

 

The amount paid as Repayment of Principal Amount of Home Loan by an Individual/HUF is allowed as tax deduction under Section 80C of the Income Tax Act. This tax deduction is the total of the deduction allowed under Section 80C and includes all the other tax savings investments (amount invested in PPF Account, Tax Saving Fixed Deposits, Equity Oriented Mutual funds, National Savings Certificate, Senior Citizens Saving Scheme, etc.) to be claimed under Section 80C. However, the maximum tax deduction allowed under Section 80C is Rs.1, 50,000. This tax deduction under Section 80C is available on “Payment Basis” irrespective of the year for which the payment has been made.

 

The tax benefit of home loan under this section for repayment of principal part of the home loan is allowed only after the construction is completed and the completion certificate has been awarded. No deduction would be allowed under this section for repayment of principal for those years during which the property was under construction.

 

Moreover in case the house property, acquired with home loan, is sold within five years from the end of the year in which possession of the house was taken, all the deduction allowed for Principal repayment in earlier years shall be withdrawn. The aggregate amount of tax deduction for Principal repayment already claimed in respect of previous years shall be treated as income of the year in which the said property is sold. Also, no deduction under Section 80 C shall be allowed for principal repayment made during the year, in which the property is sold.

 

Note : Besides the deduction allowed on principal repayment, payment made towards stamp duty and registration charges are also allowed to be claimed under Section 80C (within total limit of Rs.1,50,000) even if the assessee has not taken home loan. However, these can only be claimed in the year in which these were paid.

 

Section 24: Income Tax Benefit on Interest on Home Loan :

 

As per Section 24, the Income from House Property shall be reduced by the amount of Interest paid on Home Loan where the loan has been taken for the purpose of Purchase/ Construction/ Repair/ Renewal/ Reconstruction of a House Property. For this section, House Property is classified under two types :

 

1. Self Occupied House Property
2. Let Out House Property

For Self – Occupied Property :

 

The maximum tax deduction allowed under Section 24 for interest component of loan for a self-occupied property is Rs. 2 Lakhs.

 

For Let – Out Property :

 

There is no maximum limit prescribed for claiming the deduction under section 24 in respect of interest component of loan for let out property. This implies that the taxpayer can avail the tax deduction of the whole amount of interest paid by him on the home loan.

 

Further, if an assessee has more than one self- occupied house, then he has to select one house as self-occupied and the other house/s shall be treated as let-out. In this case he has to offer “Notional Rent” for taxation, as Annual Letable Value, and can claim the full interest paid by him as deduction under section 24. So in order to maximize the tax benefits, it is always advisable to treat the property, on which interest paid is lower, as self-occupied and the others as let – out in case the interest paid on any or all of the other properties are more than Rs.2 lakhs.

 

Notional Rent : There is no strict provision to calculate the notional rent of any property. Generally, the rent received on the property in neighborhood is deemed to be the rent received on the said property and shown as income from house property.

 

Notes :-

 

• It is to be noted that this tax deduction of Interest on Home Loan under Section 24 is deductible on “Payable Basis”, i.e. on Accrual Basis. Hence, deduction under Section 24 should be claimed on yearly basis even if no payment has been made during the year as compared to Section 80C which allows for deduction only on payment basis.

 

• Moreover, if the property (Self – Occupied) is not acquired / constructed completed within 3 years from the end of financial yearin which the loan was taken, the interest benefit in this case would be reduced from 2 Lakhs to Rs 30,000 only. This limit of 3 years has been increased to 5 years from Financial Year 2016-17 and onwards.

 

 

Summary of Deduction for the Interest Component of Home Loan under Section 24
Type of Property	Self Occupied Property		Let Out Property
Completion Status	Completed within 3 years (5 yrs from FY 16-17)	Not completed within 3 years (5 yrs from FY 16-17)	Completed within 3 years (5 yrs from FY 16-17)	Not completed within 3 years (5 yrs from FY 16-17)
Deduction Allowed	Rs. 2,00,000	Rs. 30,000	No Limit	No Limit

 

INCOME TAX TREATMENT OF PRE-CONSTRUCTION INTEREST :

 

Section 24 very specifically states that Tax Deduction for payment of Interest on home loan shall NOT be allowed before the “Construction is Completed”. In such cases –

 

1. If Loan is taken for purpose of Repair/ Renewal/ Reconstruction: 

No Tax Deduction allowed for Interest paid before Completion.

2. If Loan is taken for the purpose of Purchase/ Construction:

The Interest that has been paid before the completion of construction should be aggregated and the whole aggregated amount shall be allowed as tax deduction in 5 equal installments for 5 successive Financial Years starting from the year in which the construction has been completed.

 

For Example : Mr. X purchases a House in Mumbai in April 2009 and took a loan of Rs. 10,00,000 from a Bank paying Interest @ 10% p.a. The Construction was completed in April 2011.

 

Now, As per Section 24 of the Income Tax Act, tax deduction for payment of Interest would only be allowed from financial year 2011-12 onward.  However, the Interest paid on Home Loan before the completion of Construction (i.e. Rs. 2,00,000) would be allowed as tax deduction for the next 5 Financial years @ 40,000 p.a. commencing from Financial Year 2011-12 onward.

 

Notes :-

 

• Taxpayer cannot claim any deduction for Commission Paid for arranging the Loan.

 

• Tax Benefits of Interest on Home Loan can be claimed only by the person who has acquired or constructed the property with the Borrowed Funds. It is not available to the Successor of the Property.

 

 

For the purpose of simplicity and easy understanding, a comparison of Tax Benefit on Home Loan under Section 24 and Section 80C has been summarized as under:-

 

 

Particulars	Section 24	Section 80C
Tax Deduction allowed for	Interest	Principal
Basis of Tax Deduction	Accrual basis	Paid basis
Quantum of Tax Deduction allowed	Self Occupied Property :Rs. 2,00,000; Let Out Property: No Limit	Rs. 1,50,000 (including other tax savings investments made, if any)
Purpose of Loan	Purchase/ Construction/ Repair/ Renewal/ Reconstruction of a House Property.	Purchase / Construction of a new House Property
Eligibility for claiming Tax deduction	Purchase/ Construction should be completed within 3 years (5years from FY 16-17)	Nil
Restriction on Sale of Property	Nil	Tax Deduction claimed would be reversed if Property sold within 5 years

 

Section 80EE: Income Tax Benefit on Interest on Home Loan (First Time Buyers):

 

For FY 13-14 & 14-15 (AY 14-15 & 15-16) :-

 

Vide Finance Act 2013, an individual is allowed a deduction up to a limit of Rs 1,00,000 being paid as interest on a loan taken from a Financial Institution, sanctioned during the period 01-04-2013 to 31-03-2014 (amount of loan not exceeding Rs 25 lakhs) for acquisition of a residential house whose value does not exceeds Rs 40 lakhs. However the deduction is available if the assessee does not own any residential house property on the date of sanction of the loan.

 

Notes :-

 

• The Deduction is available only for two years i.e. for A.Y. 2014-15 & A.Y. 2015-16.

 

• Total Deduction which can be claimed in Both years in aggregate is 1,00,000/-.

 

• Deduction U/s. 80EE is in addition to deduction Under Section 24. So if an assessee is paying interest on Self Occupied Property Purchased during A.Y. 2014-15 of Rs. 2.40 Lakh , he can claim interest up to 1.50 Lakh under section 24 and balance 0.90 lakh U/s. 80EE.  Assessee can claim the balance deduction of 0.10 Lakh in Assessment Year 2015-16.

 

 

For FY 16-17 (AY 17-18) :-

 

Arun Jaitley while announcing the Budget 2016 re-introduced Section 80EE which provides for additional Deduction of Rs. 50,000 for Interest on Home Loan u/s 80EE. This incentive would be over and above the tax deduction of Rs. 2,00,000 under Section 24 and Rs. 1,50,000 under Section 80C.

 

This Deduction of Section 80EE would be applicable from FY 16-17 only in the following cases:-

 

• This deduction would be allowed only if the value of the property purchased is less than Rs. 50 Lakhs and the value of loan taken is less than Rs. 35 Lakhs.

 

• The loan should be sanctioned between 1st April 2016 and 31st March 2017.

 

• The benefit of this deduction would be available till the time the repayment of the loan continues.

 

• This Deduction would be available from Financial Year 2016-17 (AY 17-18).

 

 

Notes :-

 

• The above tax deductions are per person and not per Property. So in case an assessee has purchased a property jointly and have taken a joint home loan, each co-borrower repaying the amount would be eligible to claim whole deduction separately. However, if the loan is taken jointly and the property is not co-owned by the co-borrowers of the loan, then the joint borrowers would NOT be able to claim the deductions separately, as the prima facie condition to claim the deductions is that “ one should be the owner / co-owner of the property”. Also, the Co-owners shall be liable to claim the deductions in the proportion of their ownership mentioned in the Deed of the property, and if the proportion is not mentioned, then the proportion of ownership shall be deemed to be equally owned by them.

 

• Tax Benefits under Section 24 and tax benefits (Allowances) under section 10 for HRA can be claimed simultaneously at the same time.

 

For claiming the above tax deductions, one would be required to furnish the statement provided by the lender clearly indicating the amount payable and paid towards Interest and Principal. After claiming the above deductions of Tax Benefit on Home Loan, the balance Income of an Individual would be taxed as per the Income Tax Slab Rates. 

 

 

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