Home loans: heavy liability but also big on tax benefits

Given the high property prices in metros, on an average an apartment having two bedrooms, hall, and kitchen of 1,200 sq. ft in an ordinary location will cost at least 60 lakh or 5,000 per sq. ft and or more. So, to buy such a house, most people take the help of a home loan, which usually forms 70-80% of the apartment’s value. This is probably the biggest loan that a person will ever take; thankfully, the related tax breaks are also significant. For example, a person servicing a home loan can claim deduction against principal repayment as well as against payment of interest. For investors, this enhances their profit margins. “Taking a home loan for investing in a residential property can significantly affect the buying decision,” said Amit Maheshwari, managing partner, Ashok Maheshwary and Associates, a chartered accountancy firm. Take a closer look at your home loan’s tax benefits.

Deduction on repayment

The equated monthly instalment (EMI) that you pay has two components, principal and interest. Both qualify for tax deduction under two separate sections of the Income-tax Act, 1961. Principal repayment can be claimed as deduction under section 80C of the Act, whereas interest under section 24(b).

Various other investments and expenses qualify for deduction under section 80C, which has an upper limit of 1.5 lakh. However, section 24(b) provides exclusive deduction against interest payment on home loan. In this, you can claim deduction for interest payment on borrowed capital for the purpose of purchase, construction, repair, renewal or reconstruction of the house property. If home loan is taken for purchase or construction of a house, the exemption limit if the house is self-occupied is capped up to 2 lakh, but there is no cap if the house is let out.

Take a joint home loan

Often borrowers take a joint home loan to enhance the loan eligibility. This is usually done along with spouse, parents, or in certain cases, with siblings. The tax benefit can be claimed by all the borrowers individually, provided they are co-owners of that property too. “When a property is purchased jointly, and the loan is co-borrowed, the deduction of 2 lakh and deduction under section 80C (maximum 1.5 lakh) is allowed to both the co-owners cum co-borrowers in the ratio of their ownership,” said Archit Gupta, chief executive officer and co-founder, www.cleartax.in. If you buy a property along with your spouse and both of you share equal rights over the property, you both are eligible to claim deduction equally. So, if the total payment in a year towards home loan is 6 lakh, with 1 lakh as principal and 5 lakh as interest, both the borrowers can claim 50,000 each under section 80C (against principal) and 2 lakh each under section 24(b), if it’s a self-occupied house, or 2.5 lakh each if it’s a let-out property.

Things to remember

You can only claim tax benefit on repayment of home loans once the property is complete. If you buy an under-construction property, you are not allowed to claim the deduction till the time the property is fully completed and you get possession.

“(But) pre-construction interest can be claimed in five equal instalments starting from the year in which construction is completed (within the overall limit mentioned above),” said Gupta. For instance, if you have paid 5 lakh as interest on home loan during the construction period, you can claim 1 lakh (one-fifth of 5 lakh) each year, after you get possession of the house.

In case of a joint loan, typically lenders insist on borrowers opening a joint bank account to pay EMIs. Make sure each co-borrower contributes according to her respective share in the joint account. It helps to provide proof of contribution or payment to the taxman in case of scrutiny.

A home loan is a big liability, but it also offers substantial tax breaks. Understand these carefully so that you can make the best of the situation.