Some conditions that enable an assessee to claim tax deductions on the interest and principal components
Individuals can claim a tax deduction on the principal and interest components of a home loan as per the Income Tax Act 1961. These deductions are available under Section 24(b) to assessees who have taken a loan to either buy or build a house.
In case these conditions are met, interest on borrowed capital is deductible up to Rs 1.5 lakhs:
Capital is borrowed on or after April 1, 1999 to acquire or construct a residential property The acquisition/construction should be completed within three years from the end of the financial year in which capital was borrowed.
The bank extending the loan certifies that the interest is payable on the amount advanced for acquisition or construction of the house, or as refinance of the principle amount outstanding under an earlier loan. In case the conditions stated are not met, interest on borrowed capital is deductible up to Rs 30,000. However, the capital should have been borrowed before April 1, 1999 for the purchase, construction, or repairs of a house. If the capital was borrowed on or after April 1, 1999, the construction should have been completed within three years from the end of the year in which the capital was borrowed. In addition, principal repayment of the loan borrowed is eligible for a deduction of up to Rs 1 lakh under Section 80C from the assessment year 2006-07.
The maximum deduction permissible in a financial year for the original loan (if any) plus for any additional loans taken is Rs 1.5 lakhs. Hence, if your deduction on an 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 them.
Under the Income Tax Act, only the person who has taken the loan can claim tax rebates. 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 taxpayers with independent income sources, can get tax deductions on the same housing loan. In this case, the tax benefits can be shared to the extent of the amount of loan taken in their names.
If it is proved that a home loan is simply an arrangement between a loan-seeker and a 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.
Capital gains and tax
If a person buys a house and sells it within the same year or after three years, and a profit is made, a capital gains tax liability arises on it. For example, if a person purchases a house for Rs 45 lakhs with a loan and sells it in the same year for Rs 65 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, then a long-term capital gains tax liability would have arisen.
Long-term capital gains will be exempt from tax if the amount (after factoring in the indexation benefits) is invested in capital gains tax saving bonds or in a house as specified under Section 54.
Individuals can claim a tax deduction on the principal and interest components of a home loan as per the Income Tax Act 1961. These deductions are available under Section 24(b) to assessees who have taken a loan to either buy or build a house.
In case these conditions are met, interest on borrowed capital is deductible up to Rs 1.5 lakhs:
Capital is borrowed on or after April 1, 1999 to acquire or construct a residential property The acquisition/construction should be completed within three years from the end of the financial year in which capital was borrowed.
The bank extending the loan certifies that the interest is payable on the amount advanced for acquisition or construction of the house, or as refinance of the principle amount outstanding under an earlier loan. In case the conditions stated are not met, interest on borrowed capital is deductible up to Rs 30,000. However, the capital should have been borrowed before April 1, 1999 for the purchase, construction, or repairs of a house. If the capital was borrowed on or after April 1, 1999, the construction should have been completed within three years from the end of the year in which the capital was borrowed. In addition, principal repayment of the loan borrowed is eligible for a deduction of up to Rs 1 lakh under Section 80C from the assessment year 2006-07.
The maximum deduction permissible in a financial year for the original loan (if any) plus for any additional loans taken is Rs 1.5 lakhs. Hence, if your deduction on an 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 them.
Under the Income Tax Act, only the person who has taken the loan can claim tax rebates. 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 taxpayers with independent income sources, can get tax deductions on the same housing loan. In this case, the tax benefits can be shared to the extent of the amount of loan taken in their names.
If it is proved that a home loan is simply an arrangement between a loan-seeker and a 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.
Capital gains and tax
If a person buys a house and sells it within the same year or after three years, and a profit is made, a capital gains tax liability arises on it. For example, if a person purchases a house for Rs 45 lakhs with a loan and sells it in the same year for Rs 65 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, then a long-term capital gains tax liability would have arisen.
Long-term capital gains will be exempt from tax if the amount (after factoring in the indexation benefits) is invested in capital gains tax saving bonds or in a house as specified under Section 54.
