The world of borrowing and lending can get alarmingly complicated, particularly if you’re taking a home loan. First, you have to keep an eye on the direction of interest rates; any increase could affect your loan tenure. Most people will tell you that the tax benefits that come with home loans could cushion the impact.
While that is undoubtedly true, do you know how much you can claim as deduction and how much is tax free? While you don’t need to cite chapter and verse of the Income Tax Act, it makes definite sense to know the broad provisions and to understand how these affect your loan calculations. Without at least a reasonable understanding, you might not be able to make the most of your home loan.The EMI you pay for your housing loan has a principal component and an interest component, and tax benefits are offered on both components. The principal amount paid is allowable as deduction from taxable income under Section 80C, while interest paid is allowed as a deduction under Section 24(b).
How much interest you pay...
|Amount of loan||Rs 15 lakh|
|Date of borrowing||1 July 2007|
|Tenure of loan||10 years|
|Date of completion of construction||31 Jan 2010|
|Monthly instalment to be paid||Rs 21,500|
- of which principal amount is
- and interest amount is
...and how much tax you save
|Annual deduction for the interest paid from 2009-10 to 2013-14. Break up as follows.||Rs 1,45,800|
|Pre-construction period||Rs 37,800|
|Post-construction period||Rs 1,08,000|
|Annual deduction for interest paid from 2014-15 onwards||Rs 1,08,000|
|For the interest paid during the pre-construction period deduction can be claimed for five years after construction is over. Principal repayment of up to Rs 1 lakh a year is eligible for tax deduction under Sec 80C.|
Principal: You can claim a deduction for the principal portion together with the amount paid for stamp duty, registration fee and other expenses for the purpose of transfer of the purchased property starting from the financial year in which the property is bought or the construction is completed. Such a deduction is available only in respect of a housing loan taken for purchase or construction of a residential house; the maximum deduction allowable in a financial year is Rs 1 lakh.
In order to claim the deduction, you cannot sell the property for five years from the end of the financial year in which you took possession of it. In case the property is sold before this stipulated period, the deduction that was allowed under Section 80C will be discontinued. Further, the amount already allowed as deduction will be considered under the head of your income of the financial year in which the property was sold.
Here’s how it works. Assume you take a 10-year home loan of Rs 15 lakh at a fixed rate of 12%. The EMI works out to Rs 21,500. The EMI has a principal component and an interest component which progressively change over the term of the loan.
For the sake of simplicity, we assume a uniform interest of Rs 9,000 a month and a uniform principal repayment of Rs 12,500 a month. You can start claiming the deduction for the principal amount paid starting from the financial year in which construction is completed i.e. 2009-10. However, you cannot sell the property for the next five years up to 31 March 2015.
Interest: You can claim a deduction for the interest paid on a housing loan, even on loans taken for repair, renewal or reconstruction of an existing property. Such deduction is also available on an accrual basis.
In case of a self-occupied property (financed by a housing loan taken after 1 April 1999 to buy or build), you can claim interest deduction of up to Rs 1.5 lakh a year. It is also essential that the acquisition or construction of the property is completed within a period of three years from the end of the financial year in which the loan is taken.
It is important to note that the interest deduction can be claimed only from the financial year in which the property is acquired or constructed or reconstruction is completed. During the pre-acquisition or pre-construction period, the interest deduction can be claimed equally over five financial years, starting from the financial year in which the event occurs.
In the above case, the pre-construction period is from 1 July 2007 to 31 March 2009. The total interest for that period is Rs 1,89,000 (Rs 9,000 for 21 months) and you can claim deduction for Rs 37,800 (Rs 1,89,000/5) every year for five years.
In case the property in question is let out on rent, you, as the borrower, can avail of the deduction of interest on housing loan on an actual basis. There is no maximum ceiling prescribed in this case. You will also be eligible to get a flat deduction of 30% of the annual value of the property. This is the value of the property computed as prescribed under Section 23 of the IT Act.
There may be some circumstances under which you are unable to occupy your own property because you work in a different city and stay in a rented house. In that case, the house lying vacant (assuming you derive no benefit, such as house rent, from it) will be treated as self-occupied property and you can claim interest deduction on it (as explained earlier).
In addition to this deduction, you can also claim house rent allowance (HRA) exemption for the rent you pay (for the house you stay in the city where you work). What this means is that you can effectively claim both tax benefits in the same financial year—HRA exemption as well as deduction of interest on the housing loan for the property you are unable to occupy.
The authors are tax professionals with Ernst & Young, India