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Thursday, February 16, 2017

Home Loan Tax Benefits

 
You are aware of the basic tax exemptions on home loans, but there are more ways a home buyer can benefit.
 
The year 2016 is turning out to be one of the best for home buyers, with more tax benefits, interest rate cuts, stagnant property prices and new launches in the affordable segment. Many of you may be looking to take advantage of these benefits and buy a house. While hunting for a house at the right price, you'll be haggling with the bank to cut a loan deal too. Even if you get a discount on both, your tax bill can cost you dear, unless you know the rules well. Everyone knows the basics--you can claim up to `1. 5 lakh for repayment of principal under Sec 80C and up to `2 lakh under Sec 24 for interest payment. Here is a list of lesser-known and often missed tax benefits on home loans.

1 You can claim tax benefit on interest paid even if you missed the EMI. Unlike the deduction on property taxes or principal repayment of home loans, which are available on `paid' basis, the deduction on interest is on accrual basis. Even if you have missed a few EMIs during a financial year, you would still be eligible to claim deduction on the interest part of the EMI for the entire year. However, retain the documents showing the deduction so that you can substantiate if questioned by tax authorities.

2 Most taxpayers are unaware that charges related to their loan qualify for tax deduction. These charges are considered interest, and therefore, deduction can be claimed on the same. Moreover, there is a tribunal judgement which held that processing fee is linked to services rendered by the bank in relation to the loan granted, and is thus covered under service fee. Therefore, it is eligible for deduction under Section 24 against income from house property. However, any penal charges such as those for missing an EMI or late repayment, would not be eligible for deduction.

3 You score negative tax points if you sell a house within five years from the date of purchase, or five years from the date of taking the home loan. Any deduction claimed under Section 80C in respect to principal repayment of housing loan would get reversed and added to your annual taxable income for the year in which the property is sold, and you will be taxed at current. Thankfully, the loan amortisation tables are such that the repayment schedule is interest heavy and the tax-reversal rule only applies to Section 80C. You can still hold on to the tax benefits you claimed under Section 24 for interest payment.

4 Loans taken from relatives and friends are eligible for tax deduction. You can claim a deduction under Section 24 for interest repayment on loans taken from anyone, provided the purpose of the loan is to purchase or construct a property. You can also claim deduction for money borrowed from individuals for reconstruction and repair of property. It does not have to be from a bank.The lender must also file an income-tax return reporting the interest income and paying tax on it. This rule, however, is only applicable for interest repayment. You will lose all tax benefits for principal repayment under Sec 80C if you do not borrow from a bank or employer. Additional benefit of `50,000 under Sec 80EE is also not available if you borrow from individuals.

5 You can claim pre-construction period inter est for up to five years. You know you can start claiming your home loan benefits once the construction is complete and you get possession. But what happens to the instalments you paid during the construction or before you got the keys? As per the rules, you cannot claim principal repayment but interest paid during the period can be accrued and claimed post-possession. The law allows deferred deduction on interest payable during the pre-construction period. The deduction is available equally over a period of five years, starting from the year of possession

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