- Interest
- Principal
There are some tax benefits available on home loans. The tax benefits can be claimed on both the principal and interest components of a home loan as per the Income Tax Act. These deductions are available to assessees who have taken a loan to either buy or build a house, under Section 24(b).
A) Tax benefits on interest component
If these conditions are met, interest on borrowed capital is deductible up to Rs 1.5 lakhs:
- Loan is taken on or after April 1, 1999 to buy or build a property.
- The purchase or construction should be completed within three years from the end of the financial year in which the loan was taken. The bank extending the loan should certify that interest is payable against the loan advanced to buy or construct a house.
- If these conditions are not met, the interest on the loan is deductible up to Rs 30,000 only. However, these conditions have to be fulfilled then: The loan should have been taken before April 1, 1999 to purchase or construct the house.
- It could have been taken on or after April 1, 1999 if for reconstruction, repairs or renewals of a house.
- If the loan was taken after April 1, 1999, but the construction is not completed within three years from the end of the year in which capital is borrowed.
B) Tax benefits on principal component
The principal component of the loan is eligible for a deduction of up to Rs 1 lakh under Section 80C from assessment year 2006-07.
The maximum deduction permissible in a financial year on the original loan plus on any additional loans taken is Rs 1.5 lakhs. Hence, if your deduction on the existing loan is less than Rs 1.5 lakhs, you can claim further benefits from an additional loan, subject to an upper limit of Rs 1.5 lakhs in a financial year. It is to be noted that the tax benefits under Section 24 and deductions under Section 80C of the Income Tax Act can be claimed only when the payment is made. If a person fails to make EMI payments, he cannot claim tax benefits on the amount supposed to have been paid.
If a person buys a house and sells it within the same year or after three years, and if any profit is made, a capital gains tax liability arises on the profits. For example, if a person purchases a house for Rs 55 lakhs with a loan and sells it in the same year for Rs 75 lakhs, he makes a profit of Rs 20 lakhs. On this profit, he will be liable to pay short-term capital gains tax since the sale took place in the same year. But, if the sale had taken place after three years, a long-term capital gains tax liability would have arisen.
Long-term capital gains are exempt from tax if the profit amount (after factoring in the indexation benefits) is invested in capital gains tax-saving bonds or in a house as specified under Section 54.
According to the Income Tax Act, only the person who has taken the loan can claim tax rebates. Tax deductions can be claimed on home loan interest payments, subject to an upper limit of Rs 1.5 lakhs for a financial year. Interest on a fresh loan can be claimed as a deduction, subject to the upper limit. The interest on a loan, taken for repairs, renewals or reconstruction, also qualifies for the deduction of Rs 1.5 lakhs.
A husband and wife, both of whom are taxpayers with independent income sources, can get tax deduction benefits on the same housing loan. In this case, the tax benefits can be shared to the extent of the amount of loan taken against their names.
If it is proved that a home loan is simply an arrangement between the loan-seeker and the builder or with a third party for the purpose of claiming tax benefits, the tax benefits will not be allowed, and benefits previously claimed will be clubbed to the income and taxed accordingly.
