Easy Ways To Claim Interest On Your Home Loan

A Home Loan can help you buy the house of your dreams, but it comes with interest charges added to the principal amount. While there’s little you can do about the interest, you can reduce the financial stress it sometimes leads to.

This article touches upon the tax benefits that can be claimed on the interest charges and how to go about getting them.

Claim Tax Deduction Under Section 24

Under Section 24 of the Income Tax Act, you can claim a tax deduction of Rs.2 lakh from the interest paid for your Home Loan. However, remember that this rule is only applicable if you are going to live in the house or leave it vacant.

Easy Ways To Claim Interest On Your Home Loan

If you’re going to rent it out, there’s no cap on the tax exemption from interest charges, which means you can claim back the entire interest amount paid. But, the rental income earned from your property will be tabbed under ‘income from other sources’ and you’ll be liable to pay taxes for it.

For example, Sachin takes a loan of Rs.35 lakh with a Housing Loan Interest of 10.25%, which comes to Rs.2.32 lakh interest charges per year. In such a scenario, Sachin can claim a deduction of Rs.2 lakh if he intends to live in the house, thereby losing Rs.32,000. On the other hand, he can claim the entire Rs. 2.32 lakh if he puts the house up for rent.

But, if Sachin has booked a property which is still under construction, then the tax deduction will be limited to Rs.2 lakh, provided the construction is completed within 3 years from its inception. If this does not happen, then only Rs.30,000 can be availed by him.

Considering the rising inventory and delayed housing project scenario of India, the Union Budget 2016 proposed that the bar be raised from 3 to 5 years so that homebuyers don’t lose out on tax benefits, which is something borrowers can be happy about.

Avail Tax Benefit on Pre-interest Charges

Sometimes, you might book an under-construction property to gain the benefit of a lower price. At this point, you can apply for a Home Loan and get it sanctioned. After that, your financial institution will start disbursing the loan amount to your builder. Now, the lender will start levying the rate of interest from the day the loan amount is disbursed.

As per the Income Tax Act, you can claim deductions on the interest paid only after the house gets constructed. However, there’s a provision that states you’re entitled to claim deductions on pre-construction interest charges in 5 equal installments, for a period of 5 years, starting from the year when the house gets completed.

For example, let’s assume Abhishek books an under-construction house in June 2014 and he has to pay a total of Rs.2 lakh as pre-interest charges till the house gets completed. Now, let’s consider that the construction was finished in May 2016, in which case he can claim the entire Rs.2 lakh in five instalments. So, starting from the financial year 2016-17, every year he’ll get a tax rebate of Rs. 40,000 (Rs.2 lakh in 5 instalments).

Other Tax Benefits

Besides these, you can also claim the money you paid for registration, stamp duty, and other miscellaneous expenses under Sec 80C of the Income Tax Act. These deductions can be claimed in the year of purchase of the house. For instance, if you’ve bought a house in May 2016 and paid Rs.1 lakh towards stamp duty and registration charges, you can claim tax deductions any time before the end of FY 2016-17.

In the case of an under-construction property, deductions on the processing fee and the interest charges can be claimed only after the property is ready for possession. That being said, you should know that any principal amount repayment done during the construction period can’t be claimed.

Sale of Property and its Tax Implications

If you sell your property within 3 years from the date of purchase, then you’re liable to pay capital gains tax on the profits you gain from it. However, if you don’t want to pay tax, you can re-invest the sales proceedings in special bonds or in another property for a lock-in period of 3 years. This way, you can avoid paying short-term capital gains tax.

Additional Tax Deduction for First-time Home Buyers

The Union Budget 2016 was a huge relief to first-time home buyers, in regard to tax exemption. The annual budget announced that if you’ve taken a Home Loan amounting to Rs.35 lakh for your first property purchase, then you’ll get an additional tax deduction of Rs.50,000 on the interest charges paid. But, to avail this benefit, you have to ensure that the net value of your potential property is not more than Rs.50,000.

Housing finance, in the form of Home Loans, has helped many people buy their dream home. But, the interest charges can sometimes increase your financial burden, which is why you should be aware of the tax benefits associated with it so that you can save more in the long run.