Last updated: January 31st, 2020 3:34 PM

Tax Deductions for Home Loan - Home Owners Guide

The Income Tax Act has incorporated several provisions for the benefit of assessees who are purchasing their own home by taking a loan. Ownership of an own home has several benefits associated with it. The benefits include savings on rental costs, an ability to capitalize on any increase in real estate prices, and income tax deductions. A taxpayer may purchase a residential property for own use by availing of a home loan. In such circumstances, the taxpayer can save on the amount of tax liability by deducting a portion of the home loan repayment from the taxable income. The repayment of a home loan consists of two components, the principal and the interest. The Income Tax Act allows deductions for both of these components.

Completion of Building Certificate

• The availability of a Completion of Building (CoB) certificate is used to determine whether the immovable property in question is eligible for the home loan deduction benefit under the Income Tax Act.
• A CoB certificate is an assurance that the builder has followed the sanctioned plan. The builder should apply for the CoB certificate before handing over possession to the buyer.
• The authority to be approached for obtaining the CoB certificate depends on the location of the construction site. In the case of urban areas, the Urban Development Authority (UDA) of the concerned state should be approached. In the case of municipalities, the Municipal Corporation Development Authority (MCDA) should be approached. In the case of villages, the concerned Panchayat should be approached. The format of application and the fees payable varies from state to state.
• The CoB may be obtained after the sale deed is executed and sale proceeds are received. However, the date of making the application for the CoB certificate should not fall after the date of the transfer of possession.

Tax Deduction for Home Loan Principal Repayment

Individuals and HUFs can avail tax deduction under Section 80C of the Income Tax Act for the amount paid as repayment of principal for a home loan. The tax benefit can be claimed after the construction is complete and the CoB certificate is awarded to the taxpayer. The maximum deduction available to taxpayers under Section 80C, Section 80CC, and 80CCD is Rs.1.5 lakhs. Further, Section 80C deduction also includes deductions for the amount invested in PPF Account, Tax Saving Fixed Deposits, Equity Oriented Mutual funds, National Savings Certificate, Senior Citizens Saving Scheme, and so on. Hence, taxpayers repaying a home loan will be able to take advantage of the deduction under Section 80C till the limit of Rs.1.5 lakhs is crossed after considering all the permissible deductions. A taxpayer availing deduction under Section 80C for the repayment of a home loan must hold the home in the assessee's own name and maintain the home loan for a minimum period of five years. If the taxpayer has claimed deduction under Section 80C in relation to certain financial years and then transferred the house property before the expiry of five years, then no further deduction will be allowable under Section 80C. Further, the aggregate amount of all tax deductions for home loan principal repayments already claimed by the taxpayer under Section 80C would be deemed to be the income of the assessee in the year in which the property has been sold. The effect of this penal provision is two-fold. First, the benefit of exemption granted under the Act for previous financial years will stand withdrawn. Second, the entire amount of benefits granted will be assessed to tax in a single year. Hence, the assessee is pushed into a higher tax slab for all the income earned in relation to the particular financial year. Hence, taxpayers who are planning to purchase a home or sell a home may consult a tax expert beforehand prior to making a decision.

Tax Deduction for Home Loan Interest Payment

Taxpayers repaying a home loan can claim income tax deduction under two sections of the Income Tax Act, namely Section 24 and Section 80EE.

Section 24 Deduction for Home Loan

• Section 24 tax deduction can be availed by taxpayers on interest accrued on home loan where a home loan has been availed for purchase or construction or repair or renewal or reconstruction of a residential house property. It may be noted that income tax deduction under Section 24 is deductible on a payable basis, not on a paid basis. Hence, deduction under Section 24 can be claimed on a yearly basis, even if no home loan repayment has been made during the year. The deduction under Section 24 will be based on whether the property is self-occupied. In the case of self-occupied property, the maximum limit of deduction is Rs.2 lakhs.
• In case the property for which the home loan has been taken is not self-occupied, then there is no maximum limit, and the taxpayer can take Section 24 deduction for the whole interest amount, which has fallen due during the year. In case a property has not been self-occupied by the taxpayer due to employment, business or profession carried on at any other place, and the assessee has to reside in a different residence not belonging to the assessee, then the amount of tax deduction allowed under Section 24 will be restricted to two lakh rupees.
• In the case of deemed to be let out properties, the same restrictive ceiling limit of two lakh rupees will be applicable. Also, taxpayers who avail deduction under Section 24 must complete the construction or acquisition of property within five years of taking the loan. Else, the amount of deduction under Section 24 will be reduced from two lakh to thirty thousand rupees.

No Tax Deduction for Pre-EMI Payments

At the time of purchasing an apartment or booking an apartment, the home loan is disbursed to the builder in stages, and the home buyer begins to service the loan in the form of a Pre-EMI.  In such circumstances, the Act categorically states that tax deduction for payment of Interest is not allowed before the construction is complete.

Section 80EE Deduction for Home Loan

In addition to the above deduction, deduction under Section 80EE can be claimed assessees who meet the prescribed conditions for eligibility. A tax deduction of fifty thousand rupees can be claimed for interest paid on a home loan. The deduction under Section 80EE is over and above the tax deduction of two lakh rupees under Section 24 and one lakh and fifty thousand rupees under Section 80C. However, not all taxpayers can claim a deduction under Section 80EE. To be eligible to claim deduction under Section 80EE, the taxpayer must satisfy the specified eligibility conditions. The specified conditions are the following:

1. The taxpayer should be an individual assessee. However, the assessee may be a resident or non-resident.
2. The assessee has taken a loan for the purpose of purchasing or constructing a residential house property.
3. The loan should have been taken from a bank or housing finance company. The bank may be a nationalized bank or a bank that belongs to the private sector.
4. The amount of funds borrowed should not exceed thirty-five lakh rupees.
5. The value of the residential house property purchased should not exceed fifty lakh rupees.
6. The assessee should not own any residential house property on the date on which the sanction of the loan was approved.

The amount of deduction available will be the actual amount of interest paid or fifty thousand rupees, whichever is less. To know about verification of Cash Deposits by the Income Tax Department, click here.