Do you know how to get a tax deduction of up to Rs. 2.5 lakhs per annum if you have a home loan, or even more than this amount if you rent out your house property on which you have a loan?
Home loans donâ€™t just help you fulfill your dream of owning a residential property, they also come with many tax advantages for individual tax payers. Here we explain the different tax advantages of a home loan.
Q) I have a home loan, what tax deductions can I get?
If you have a home loan outstanding, you can get a deduction for both the principal amount that you repay annually and for the interest payments that you make towards the loan.
Towards the end of the tax year, you can ask your lender to give you a statement showing the total annual payments made by you towards each type of payment.
Principal Repayment: The deduction for principal repayment is allowed under Section 80C and has an annual limit of Rs. 1 lakh. You can use this entire limit either towards principal repayment, or combine it along with other eligible section 80C deductions but not exceed the Rs. 1 lakh amount.
Interest Payment: The deduction for interest payments is allowed under Section 24(b). Deduction for interest payment is allowed from the year in which the property is purchased or the year in which the construction is complete. There are different scenarios under which the amount of deduction you can take might vary.
Q) Can I claim an interest deduction while the property is under construction?
You can get a deduction for the interest paid for the period for which the property was under construction or till the property is actually purchased. However, you can claim this deduction only after you have possession of the property.
Once you have possession, the entire interest paid during the construction period can be claimed up to an annual deduction of 1/5th amount in each of the next five years, along with the interest payment for that particular year.
For instance, Shyam bought an under construction flat in July 2006 and took a loan for it for which he pays EMI. He received possession of the flat in March 2009.
The interest paid till then was Rs. 2 lakhs. For the next financial year ending in March 2010, the interest paid has been Rs. 1 lakh.
The interest deduction comprises the following: i) Rs. 1 lakh paid during the financial year 2009-10, and ii) 1/5th of the interest payment till March 2009, i.e., Rs. 40,000. So, the total deduction available to Shyam is Rs. 1.40 lakhs.
Q) Can I claim an interest deduction for a self-occupied property?
Yes, but there is an annual limit of Rs. 1.5 lakhs. This limit includes 1/5th interest of construction period.
Further ensure that the property is purchased or construction is completed within 3 years, else the deduction shall be restricted to Rs. 30,000 instead of Rs. 1.50 lakhs.
Q) Can I claim an interest deduction if I have rented out my property?
If you let-out your property on rent, the interest deduction shall be allowed in full â€“ there is no annual limit of Rs. 1.50 lakhs. The entire interest you have paid in the current financial year plus 1/5th of the interest paid during construction period is allowed in full.
Q) If I have a loan on two properties can I still get a deduction?
If you have loans outstanding on two properties you can still claim a deduction for each. However, for taxation purposes you are required to treat one of the properties as self-occupied, and the other one is deemed to be let-out.
For the self-occupied property, the interest deduction is restricted to a maximum of Rs. 1.50 lakhs.
For the deemed let-out property a notional rent that the property is expected to generate is taken as the rental income of this property from which interest deduction is allowed. For this property, the entire interest deduction is allowed, not just the annual limit of Rs. 1.50 lakhs.
Q) I took a loan for substantial repairs of my house, can I get a deduction?
Yes, you are entitled to a deduction but the amount is limited to Rs. 30,000. Further, the purpose of the loan should be for a substantial alteration to the property, for instance, construction of a new floor. Minor repairs such as re-painting are not eligible.