It is a well known fact that housing loan is considered as one of the best tax saving tools as deduction is available for both the principal and the interest component of the loan. But there is a misconception among the tax payers that deductions for both the components are available as soon as they start repaying the EMI (Equated Monthly Installment). Basis of Deduction:

•  Deduction for the principal component is to be claimed on payment basis.
• The interest component is allowed as deduction on due or accrual basis.

When to claim tax deduction: Deduction on principal component of home loan under section 80c is allowed as soon as you start repaying the home loan. Interest deduction on housing loan under section 24(b), on the other hand, is allowed only on acquisition or completion of the house property. Possession of the property is important in this case. Purpose of home loan: Tax benefit under section 80C is only allowed for buying or constructing a new home and not for improvement, extension, renovation or alteration of an existing house. On the other hand, deduction for interest is allowed under section 24(b) if the home loan is borrowed for the purpose of purchase, construction, repair, renewal or re-construction of the house property Provisions of Act to claim deduction:

• Tax benefit under section 80C will be allowed irrespective of whether the house property is self-occupied or let out.
• For deduction under section 24(b):

 In case of self occupied house property: Deduction upto Rs.150000 is available, if the loan is taken for acquisition or construction and such acquisition or construction is completed within 3 years from the end of the financial year in which capital was borrowed. On the other hand, if the loan is taken for repairs, renewals or re-construction of the house property, then the deduction will be limited to Rs.30000. In case of let out property: Interest is fully deductible without any limit.

• Total housing loan interest is segregated into pre-construction and post construction interest. The pre-construction interest will be deducted in five equal annual installments, commencing from the previous year in which the house is acquired or constructed. But the limit of Rs.1.5lakhs per annum will be applicable on total interest. No such segregation is required to claim deduction for the principal amount of the loan.

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