Home Loan Rules you might not know
The interim budget 2019 has given multiple benefits to the common man and one such benefit is the proposition of treating the second house owned by an Individual as self-occupied which means there would be no necessity on paying the income tax on the notional rent. The same will be applicable from the financial year 2019-20 after bill being passed by the Parliament. This proposition would on the hand restrict the outgo of tax but on the other hand, decrease the amount of carry-forward losses in the form of interest on the let-out property.
Let’s see some of the Rules pertaining to Home Loans in India
Tax deductions for Home Loan for House under-construction:
The language of section 80C says that the “for the purpose of purchase or constructions of residential house property the income from which is chargeable to tax under the head “Income from House Property“.
It is clear from above that till the house is not constructed and the possession is not taken over, deduction of house loan principal repayment is not available. You need to have possession and certificate of ownership to claim tax under 80C. In simple words assessee should be the owner of the house property.
But this is not the same as the interest deduction under section 24B. You can claim the deduction of interest paid on home loan later in 5 equal installments for the next 5 years from the end of financial year of possession.
Recommended Read: All about GST on Real Estate in India
Selling the House before 5 years reverses the tax saved earlier
In case Tax benefit under Section 80C for housing loan principal repayment has been claimed by the assessee and subsequently, he/she sells the house within 5 years of purchase, the benefit will get reversed and the tax-free amount claimed earlier towards principal repayment will be added to the taxable income of the subsequent year.
- Five years term is counted from the end of the financial year in which the possession of the house property is gained. Deduction for home loan principal and interest payment can only be claimed from the year in which possession is taken.
- You need to compute deduction reversal for each year in which deduction was taken against home loan principal. In case other tax saving investments in a year were already ₹ 1.50 lakhs without considering principal, there is no need to reverse that deduction. Say in case principal is partially used to fill ₹1.50 lakh limit (e.g. rest of the investments sums up to ₹ 1.30 lakhs) then only that partial amount would be reversed.
- In case you had other 80C eligible deductions as well and total amount was more than ₹ 1.50 lakhs, you can get 80C home loan principal benefit reversed only to an amount equal to ₹ 1.50 lakhs – other 80C deductions. If total eligible 80C investments were ₹ 1.80 lakhs and home loan part was ₹ 45,000 only, then only ₹ 15,000 would be added to taxable income. This amount needs to be computed separately for each year in which tax benefit was taken.
Loan taken from Friends and Family is eligible for Deductions (Interest)
The deduction of principal repayment cannot be claimed if you have taken home loan from your relatives or friends or from any other source which is not the Specified Institution/Department. But there is no such restriction on the interest amount means you can still claim the interest on the loan under section 24, which is up to ₹ 2 lakhs per year.
The loan should be taken from Specified institutions/department given below
- Central or State Government
- Any Bank including a co-operative bank
- LIC or National Housing Bank
- The public company formed and registered in India or co-operative society with main object to provide long term finance for construction purchase of houses in India.
- Assessee Employer if public company or public sector company or university established by law or a college affiliated to such university or local authority or co-operative society.
80C is not allowed for loans taken for Extension or Renovation of House
No deduction is allowed for the repayment of the principal part under section 80C, if the loan is taken for extension or addition or alteration to, or renovation or repair of house property of your existing house. But you will be able to claim interest amount under section 24(b), the limit in this case is only up to ₹ 30,000 for self-occupied properties. However, for house which is let-out (rented or second home which is not occupied), there is no limit for tax deduction.
Loan for More than One House
Tax benefit of home loan is confined to one residential house property only means no deduction of repayment of principal is allowed u/s 80C if it is for your second house. However, interest paid on home loan for second house can be claimed as a deduction under section 24(b) without any limit.
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Few points to you might not know about Home Loan:
- There is no requirement that for loan, house property should be mortgaged to the institution from which the loan has been taken, but it should be used for the purpose of purchase /construction of house property.
- The benefit is available on payment basis, no matter to which year payment is relates to or payment overdue or not.
- The above benefit is available even assessee already has another house property.
- The tax benefit under section 80C is available on residential house property only and not available on commercial house property.
- Stamp duty, registration fee and other expenses for the purpose of transfer of such house property to the assessee is also eligible for deduction under this section even assessee has not taken any loan.
- In case of property held jointly, the income from house property to be taxed in the hands of each co-owner is determined based on the share of contribution as per the provisions of the Act. For claiming the deduction, you need to submit the home loan interest certificate. This document contains information of ownership share, borrower details and EMI payments split into interest and principal.