Payments related to your place of residence—whether you own it and are repaying the Home Loan, or live in a rented house—are a big part of regular expenses. Wouldn’t it be great if you could claim tax benefits on these huge holes in your wallet?
As it turns out, you can. Tax benefits on these huge expenses can go a long way in lessening your financial burden, and, by extension, your general well-being and stress levels as well.
The Tax Benefits you Get on Home Loans
A Home Loan is unavoidable for most people buying a house. You can find offers from banks and NBFCs with varying Home Loan interest rates. To pick one, you can use Home Loan interest calculator facilities to compare various offers, and use different parameters to find the optimal Home Loan for your needs, preferences, and income.
You can claim tax benefits on both the principal amount and interest components of your repayment on Home Loans. Section 80 of the Income Tax Act deals with the principal amount, while Section 24 applies to the interest portion.
The maximum deduction allowed each year on the principal repayment is Rs.1.5 lakh The deduction on the interest part is upto Rs.2 lakh under Section 24. However, to claim this total benefit, the construction of the house has to be completed within five years from the end of the financial year on which the loan was sanctioned.
Under Section 80C, you can also claim other expenses related to the Home Loan and transfer of property for deduction, submitting to the cap of Rs. 1.5 lakh p.a.
First Time Buyers
If this is your first home purchase, then you can claim an additional benefit of Rs.50,000 under Section 80EE. To avail this, the taxpayer should not own another home at the time of loan sanction.
The loan amount should not be in excess of Rs.35 lakh. The total cost of the house should not be above Rs.50 lakh. This deduction is allowed even for property under construction.
Self-Occupied or Rented out House
As far as the principal amount benefits are concerned, the maximum deduction shall remain the same—Rs.1.5 lakh total—whether the house is self-occupied or rented out.
The interest component is affected by whether you live in the house, or have rented it out. If you or your spouse and family, or your parents live in that house, the limit on exemption on the interest component of the Home Loan payment shall remain Rs.2 lakh. However, if you have let it out for rent, the entire interest payment shall be allowed as deduction on the rental income from the house.
If you own more than one house, only one of the properties shall be considered as self-occupied. All the others shall be deemed as houses earning rental income. Even if you have not rented out a house, this notional rental income is applied for that house too. If you have an unoccupied house, it makes more sense to rent it out as soon as possible.
The interest amount deduction is applied for each house that has been deemed to earn rental income.
For Joint Borrowers and Owners
If you have taken the loan with your spouse or parent as co-borrower, you can both claim these tax benefits, provided you are both registered as owners of the house. Your deductions shall be in proportion to the ratio of your contribution in repaying the loan.
If you and your father had taken out a joint loan, but you are not registered as co-owner of the property, you cannot claim these deductions even if you are contributing more towards the loan repayment.
Rental Income and Deductions
The tax on rental income is calculated as the Gross Annual Value of Property less the property tax. This gives the NAV or Net Annual Value of Property. The gross value is the total rental income for the year. Subtract the property tax you pay from this to get the NAV.
A standard deduction of 30% is allowed on the NAV. You can also claim the total interest on Home Loan paid annually as deduction from the NAV. The principal amount payment is also exempted from taxation, within a cap of Rs.1.5 lakh per year on the total deductions.
Self-Occupied House and Interest Deduction
If your house is self-occupied, there is a cap on the tax benefits of the interest portion of your loan, of Rs.2 lakh. If you file for the interest deduction on your Home Loan, you can report a loss from house property, because your NAV is nil.
The interest amount paid over the Rs.2 lakh cap can be claimed as a loss from house property. This loss can be adjusted against other heads when you pay your income tax.
Tax Benefits on House Rent
A portion of the rent paid annually is allowed for deduction in your IT. If the taxpayer does not receive HRA as part of his salary, or if the taxpayer is self-employed, deduction is available on the excess of rent paid over 10% of total income, subject to a cap of Rs.5,000.
This exemption is only available if the taxpayer does not own any other residential property. If the taxpayer receives HRA, then the tax deduction is calculated in a different manner.
Both HRA Deduction and Loan Deductions
You can claim both HRA and Home Loan deductions, provided you have valid reasons for living in a rented house.
- You own a house in one city while you work in another.
- Your wife and children live in the home you bought, while you live somewhere else.
- You live in a rented house in the same city where your own a house, but can provide a valid reason for doing so.
So keep these all things in mind for tax deductions before applying for a home loan for your new house. While buying a home is an expensive proposition, you can shop around for the lowest Home Loan interest rates to buy your dream home. You can also get the help of experts to guide you on getting maximum benefits, through these tax deductions.