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You can claim only `30,000 tax deduction if home loan is for house renovation

A borrower can claim deduction to the tune of `2 lakh only if the loan was taken on or after 1 April 1999

Tax incentives on home loan repayment are among the few things that encourage people to buy a house. But a home loan can be taken for purposes other than buying a house, such as construction, renovation, repairs and upgrade of a house. However, the tax benefit differs depending upon the purpose for which the home loan is taken. Here’s a look at the various tax benefits attached to a home loan.

TAX ADVANTAGES

The equated monthly instalment (EMI) that you pay against a home loan is a combination of principal repayment and interest on borrowed fund. The principal repayment part can be claimed for tax deduction under section 80C of the Income-tax Act, 1961, within the overall limit of 1.5 lakh from the assessment year 2015-16. Earlier this limit was 1 lakh. The interest paid on a home loan is allowed for deduction under section 24(b) of the Act.

The upper limit for deduction was raised in the Union Budget for 2014-15 by 50,000 to 2 lakh a year. But this provision can be utilised only if the home loan has been taken for a self-occupied property.

If you have taken a home loan for renovation, repair or alteration of a residential property, you can claim deduction on the interest component under section 24(b). The deduction amount is capped at 30,000 a year, and not 2 lakh, as is the case if the loan was taken to buy or construct a house. In this case too, these limits apply if the house is for self-occupation.

CONDITIONS APPLY

A borrower can claim deduction to the tune of 2 lakh only if the loan was taken on or after 1 April 1999. If the loan was taken for construction of house, the same has to be completed within three years from the end of the financial year in which it was taken. The lender has to certify that the loan was taken to buy or construct a house.

If you have taken a home loan for a residential property that has been let out, there is no limit to the tax deduction. This is irrespective of the purpose for which the loan was taken; it could be to buy, construct, repair or renovate the house.

OTHER BENEFITS

When selling a house, the amount spent on major repairs, alterations and renovation can be taken into consideration while calculating the total cost of acquisition of the property. These costs have to be adjusted against inflation based on cost inflation index, which is released by the government every financial year. (Read more about how to calculate the indexed cost of property acquisition at http://mintne.ws/1PWsy4D).

Doing so helps the seller to reduce her long-term capital gains on sale of property, which in turn, reduces the applicable long-term capital gain tax liability.

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