The price of a property is hitting sky in most of the cities. Most people cannot afford to own their dream house. A home loan helps to fulfill the requirements and bridges the gap. However, the repayment of this loan along with the interest imposed and high EMI (monthly installment) does affect the monthly cash flows and annual finances of other expenditures.

The government of India allows tax benefits for individuals who are repaying their loans under different sections of Income Tax Act, 1961. A taxpayer can use a home loan to save tax.

 Tax Exemption on Home Loan

When taking a home loan for either construction of a house or purchasing a property, an individual is allowed for tax deductions under section 80C, section 24 and section 80EE on both principal amount and on the interest which is paid for servicing the loan.

  1. Deductions on Principal Amount

Tax saving on the principal amount of loan is under Section 80C of the IT Act, 1961, allows a maximum deduction limit of Rs.1,50,000 and is inclusive of other tax saving investments. These deductions are allowed after the construction of the house is complete and not when a home is under construction.

Tax exemption on a property is availed but its ownership is transferred before 5 years from the date of acquisition, then the tax during FY will be considered as void and will now be considered as part of taxable income accordingly.

For individuals who invest in under-construction property such as (Flats in township project) whose value is less than the basic value once the project gets completed, they are also liable for service tax on the loans taken to acquire that property.

Note: The basic value is the actual market value for the sale of a residential apartment once the construction of property is completed.

The exceptional case of getting an exemption on service tax is a condition in which the property is a single residential unit or up to 60 square meters. This exception is inclusive under the “Scheme of Affordable Housing and Partnership” as formulated by government bodies namely “Ministry of Housing” & “Urban Poverty Alleviation” and strategized under National Urban Housing and Habitat Policy (NUHHP), 2007 is effective since April 1, 2009.

  1. Deductions on Interest Amount

Under section 24, have certain provisions which allow tax benefits of interest paid on principal against home loan.

  • If the construction of property is completed within 3 years by the end year in which home loan was issued, then deduction of up to Rs. 2 Lakhs as interest amount is paid on an accrual basis.
  • If the property is not constructed within 3 years by the end year in which the loan was issued, then benefit from interest may be reduced from Rs. 2 Lakhs to Rs. 30,000 INR.
  • If the loan is taken for repairing, reconstruction or renewing the property, then there is no tax benefit on interest paid.
  • Loan issued (for purchase or construction of the property) is paid off before the time, and then the total sum of the amount is allowed for deduction in 5 equal installments for up to 5 successive fiscal years.
  1. Section 80 EE

Tax exemptions on interest paid are for first-time buyers and cannot exceed Rs.1 lakh. The loan amount should not exceed Rs.25 lakh. The extent of the tax benefit depends on cases like:

  • You are living in a house or you have rented it out.
  • If you are a sole owner or is co-owner of the property.
  • One can become a homeowner without having enormous amounts of ready cash in hand. It plays an important role in sustaining the real estate market.

For any help on ITR Filing feel free to consult the tax experts at LegalRaasta. You can file ITR yourself via our ITR software or get CA’s help on filing income tax return. You can also use the option of Business Return, Bulk Return or Revised Return Filing.