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This article would address the issue of tax benefit on home loan in case of pre and post possession of home. Planning to buy a new house but do not know how to proceed further then please note that it would be wise to go for home loan even if you have enough money because it helps an individual to save tax, while preparing to invest in a fixed asset. Acquiring a home loan makes an individual eligible for tax deduction under section 80C and section 24 of Income Tax Act Housing Loan taken and possession received in the same year. Housing Loan can be taken for purchasing or constructing a new house property. When a loan is taken in the same year in which the house property is purchased or constructed, one can enjoy the tax benefits on payment of both principal and interest component of the housing loan. Principal component: Section 80C provides that the principal component of the home loan is entitled to exemption up to Rs. 100,000 along with all other permissible instruments like, life insurance premium, PPF, ELSS, NSC etc. 80C deduction for principal repayment of home loan is allowed as soon as you start repaying the home loan. This tax benefit can be claimed irrespective of the fact that the property is being self occupied or let out. For claiming such deduction there are certain requirements to be fulfilled i.e. principal repayment will be considered for deduction only if the loan is not taken for improvement, extension, renovation or alteration of an existing house. Further, it cannot be claimed if an individual has taken home loan from relatives or friends or from any other source which is not mentioned as Specified Institution/Department. Interest Component: Section 24 of Income Tax Act is with respect to the interest allowable on the property acquired or constructed with home loan taken on or after 01-04-1999 and if such acquisition or construction is completed within 3 years of the end of the financial year in which home loan was taken, then the actual interest payable is allowed as deduction subject to maximum of Rs. 1,50,000. In any other case interest up to maximum Rs.30,000 is deductible. However the ceiling limit of Rs.1,50,000/30,000 is only in case if the property is self occupied. While in case of Let out property there is no limit on the amount of deduction of interest. If the fresh loan has been raised to repay the original loan and the new loan has been used only for the purpose of repaying the original loan then the interest paid on such fresh loan is also allowed as deduction. Penal interest on housing loan shall not be allowed as deduction. If the purchase price of the property is paid in installments with interest, the interest portion of the installment is an allowable deduction under Section 24. Further, in the Budget 2013 a new home loan tax benefit was introduced. An individual taking a loan for his first home from a bank or a housing finance corporation up to Rs 25 lakh between 1 April 2013 and 31 March 2014 will be entitled to an additional deduction of interest of up to Rs 100000 under section 80EE. With this, the total deduction for interest payment for AY 2013-14 will be Rs 2.5 lakh. If the interest component is less than the deduction limit, the balance can be claimed in the next financial year. Housing Loan taken but possession received next year or later. Often it is seen that housing loan is taken but the possession of the property is received in the next or later financial year. It may be because the property is not completed or constructed. Tax benefits of housing loan can still be enjoyed but there are certain restrictions to it. Principal component: Till the house is not constructed and the possession is not taken over, deduction on house loan principal repayment is not available. Assessee need to have possession and certificate of ownership to claim tax under section 80C. In simple words it is said that assessees should be the owner of the house property. After the possession is received, the deduction can be claimed normally up to a maximum cap of Rs. 1 lakh under section 80C. Interest Component: The interest deduction u/s 24(b) can be claimed by the assessee after the possession of the house property is taken over. However, the total amount of interest paid on home loan prior to possession of house property as can be claimed as pre-construction interest in 5 equal installments for next 5 years from the end of financial year of possession. Any pre-construction interest is allowed to be deducted in five equal installments within the Rs 1.5 lakh limit i.e. including the current year interest payment on home loan. This can be claimed only after the house is ready and possession is taken over. If the house has been let out, the taxpayer can claim the entire interest component as deduction from the rental income.
Tax benefit on home loan in case of pre and post possession of home
Direct Taxes (including International Taxation) | By ALOK PATNIA | Last updated on Oct 5, 2017
This article would address the issue of tax benefit on home loan in case of pre and post possession of home. Planning to buy a new house but do not know how to proceed further then please note that it would be wise to go for home loan even if you have enough money because it helps an individual to save tax, while preparing to invest in a fixed asset. Acquiring a home loan makes an individual eligible for tax deduction under section 80C and section 24 of Income Tax Act Housing Loan taken and possession received in the same year. Housing Loan can be taken for purchasing or constructing a new house property. When a loan is taken in the same year in which the house property is purchased or constructed, one can enjoy the tax benefits on payment of both principal and interest component of the housing loan. Principal component: Section 80C provides that the principal component of the home loan is entitled to exemption up to Rs. 100,000 along with all other permissible instruments like, life insurance premium, PPF, ELSS, NSC etc. 80C deduction for principal repayment of home loan is allowed as soon as you start repaying the home loan. This tax benefit can be claimed irrespective of the fact that the property is being self occupied or let out. For claiming such deduction there are certain requirements to be fulfilled i.e. principal repayment will be considered for deduction only if the loan is not taken for improvement, extension, renovation or alteration of an existing house. Further, it cannot be claimed if an individual has taken home loan from relatives or friends or from any other source which is not mentioned as Specified Institution/Department. Interest Component: Section 24 of Income Tax Act is with respect to the interest allowable on the property acquired or constructed with home loan taken on or after 01-04-1999 and if such acquisition or construction is completed within 3 years of the end of the financial year in which home loan was taken, then the actual interest payable is allowed as deduction subject to maximum of Rs. 1,50,000. In any other case interest up to maximum Rs.30,000 is deductible. However the ceiling limit of Rs.1,50,000/30,000 is only in case if the property is self occupied. While in case of Let out property there is no limit on the amount of deduction of interest. If the fresh loan has been raised to repay the original loan and the new loan has been used only for the purpose of repaying the original loan then the interest paid on such fresh loan is also allowed as deduction. Penal interest on housing loan shall not be allowed as deduction. If the purchase price of the property is paid in installments with interest, the interest portion of the installment is an allowable deduction under Section 24. Further, in the Budget 2013 a new home loan tax benefit was introduced. An individual taking a loan for his first home from a bank or a housing finance corporation up to Rs 25 lakh between 1 April 2013 and 31 March 2014 will be entitled to an additional deduction of interest of up to Rs 100000 under section 80EE. With this, the total deduction for interest payment for AY 2013-14 will be Rs 2.5 lakh. If the interest component is less than the deduction limit, the balance can be claimed in the next financial year. Housing Loan taken but possession received next year or later. Often it is seen that housing loan is taken but the possession of the property is received in the next or later financial year. It may be because the property is not completed or constructed. Tax benefits of housing loan can still be enjoyed but there are certain restrictions to it. Principal component: Till the house is not constructed and the possession is not taken over, deduction on house loan principal repayment is not available. Assessee need to have possession and certificate of ownership to claim tax under section 80C. In simple words it is said that assessees should be the owner of the house property. After the possession is received, the deduction can be claimed normally up to a maximum cap of Rs. 1 lakh under section 80C. Interest Component: The interest deduction u/s 24(b) can be claimed by the assessee after the possession of the house property is taken over. However, the total amount of interest paid on home loan prior to possession of house property as can be claimed as pre-construction interest in 5 equal installments for next 5 years from the end of financial year of possession. Any pre-construction interest is allowed to be deducted in five equal installments within the Rs 1.5 lakh limit i.e. including the current year interest payment on home loan. This can be claimed only after the house is ready and possession is taken over. If the house has been let out, the taxpayer can claim the entire interest component as deduction from the rental income.