POSTED BY ALOK PATNIA ON January 17th, 2011
Investing in a house is considered as one of the best tax-planning tools due to various tax-benefits and concessions provided under the Income Tax Act. When we take a housing loan, we are required to repay the loan in monthly installments spread over the tenure of the loan. The monthly loan installments are called EMIs (Equated Monthly Installments). EMI consists of two parts – Principal and Interest. Tax deduction for the repayment of the principal sum is claimed under Section 80C and interest on loan is claimed under Section 24(b).
The principal component of the housing loan EMI, which is eligible for deduction under section 80C, is subject to following conditions:
1. If the loan is borrowed for the purpose of reconstruction/renewal/repair, then deduction under section 80C is not allowed.
2. The deduction for repayment of principal of a loan is not allowed in case of commercial property.
3. The property should not be sold before a period of 5 years. If you sell the house within a period of five years from the year in which you have started claiming home loan IT benefits, the entire deduction claimed under section 80C – for repayment of principal sum of the home loan – in earlier years will be deemed to be your income in the year in which you sell the property. However, the housing loan interest deduction claimed under section 24(b) won’t be reversed.
4. If the house is in the name of your family member (spouse or your parents) and you make the repayment of loan yourself, the deduction u/s 80C won’t be allowed. (Ownership is compulsory to claim deduction u/s 24 and 80C. so, spouse can’t claim any deduction)
5. The repayment of principal sum under section 80C
is allowed only if the borrowing is from specified institutions mentioned therein.
The interest is deductible under section 24 of the income tax Act .
Interest deduction on housing loans under section 24(b) is allowed only on acquisition or completion of the house property. However, interest deduction for pre-acquisition or pre-construction period is also allowed but only after acquisition or construction is complete. It is allowed in 5 equal annual installments. But even after including the above, the total deduction should not exceed Rs. 1.5 lakh per annum.
Furthermore, the above tax deduction limit under section 24(b) is applicable only for self-occupied house property. In case of let-out or deemed to be let out house property, interest is deductible fully without any limit.
Further, in case both, husband and wife is earning, housing loan can also be jointly taken, and in that case, tax benefit can be apportioned based on the loan value. Timely and efficient tax planning go long way in lowering your total taxes by employing and taking advantages of in-built provisions of tax exemptions, deductions, concessions, rebates, relief’s, allowances and other benefits granted by the tax laws so that the incidence of tax is reduced.
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Founder and Director at Taxmantra.com
Alok Patnia founded Taxmantra.com, an expert in tax advisory & compliance. He is a Chartered Accountant having prior exposure with Ernst & Young & KPMG.