Income tax law provides the benefit of tax deduction i.e. tax deduction to taxpayers under many provisions.
Income tax law provides the benefit of tax deduction i.e. tax deduction to taxpayers under many provisions. Taxpayers can reduce the amount of tax through different investment options. Apart from investment options, EMI on home loan and rent paid to landlord is also a means by which tax burden can be reduced. On taking home loan, you can claim tax deduction on monthly EMI and on the rent that you pay for living in a rented house. Let’s know how…
1. Tax Benefit on Home Loan
Home loan is taken either for buying a house or for its construction. If a person takes a home loan for the purchase of a home, then he gets the benefit of tax deduction on both the principal amount and interest contained in the EMI paid. This benefit can be taken on an annual basis till the loan is repaid.
In case of Principal Amount
Provision for tax deduction on Principal Amount is under Section 80C of Income Tax Act 1961. A deduction up to Rs 1.5 lakh per annum can be claimed. But the condition for this is that the house for which the home loan has been taken and this deduction is being claimed, cannot be sold for 5 years after the purchase. If the owner does so, then all the old deductions will be added to his income in the year of the sale of the house.
In case of loan interest
The tax deduction on the interest paid on a home loan can be availed under Section 24 of the Income Tax Act, 1961 under the head of income from residential property. From the assessment year 2018-19, a tax deduction of up to Rs 2 lakh can be claimed on the home loan interest to be paid on self-occupied residential property. However, there is no upper limit for claiming interest deduction in case of let out property.
If you have taken loan for construction
If the loan is taken for the construction of the house, then EMI starts immediately but it takes time to complete the construction of the house. In case of loan for construction, the construction of the house should be completed in the next 5 years from the end of the year the loan is taken. The taxpayer can claim tax deduction on the interest of the home loan only after the construction of the house is completed. But the Income Tax Act also allows you to get a claim on the interest paid during construction i.e. pre-construction period interest.
If you have taken a home loan for the construction of the house, then the tax deduction on the interest can be claimed from the year in which the construction is completed. Deduction cannot be availed during the construction period. However, the claim for deduction on the home loan interest paid during the pre-construction period can be done in 5 equal installments from the year the house is completed. This claim will be outside the tax deduction claim to be made after the construction is completed. That is, after the construction of the house, you can take the benefit of deduction on the home loan interest paid in the following years as well as the home loan interest paid during the construction period, but after the house is completed. But the overall limit will be only 2 lakh rupees annually.
New section 80EEA
However, after the budget 2019, tax deduction of up to Rs 3.5 lakh can be taken on the interest of home loan. The government has made a provision for additional deduction of up to Rs 1.5 lakh under section 24 on home loans in the budget 2019, up to Rs 1.5 lakh. This additional deduction comes under section 80EEA. But there are some conditions to take advantage of this additional deduction, which are as follows…
- Only individual taxpayers can take advantage of this.
- For the purpose of buying a home, the home loan should be taken from a financial institution or housing finance company from 1 April 2019 to 31 March 2020.
- There should be no residential property in the name of the taxpayer till the date the loan is given.
- The stamp duty value of the house to be purchased should not exceed Rs 45 lakh.
- The carpet area of residential property should not exceed 645 square feet in other metro cities including Delhi NCR and 968 square feet in other cities.
This benefit of additional tax deduction of up to Rs 1.5 lakh on home loan interest can be availed till the loan is repaid from FY 2019-20 (AY 2020-21). You can understand the benefit of total tax deduction of up to Rs 3.5 lakh on home loan interest payment from this example…
Suppose you took a home loan for a house on 2 April 2019. From April 2, 2019 to March 31, 2020, interest paid of Rs 3.10 lakh. In such a situation, you can claim tax deduction of Rs 2 lakh from the residential property income under section 24 and the remaining Rs 1.10 lakh from the total income under the new section 80EEA.
A limited advantage under section 80EE
If someone has taken a home loan from 1 April 2016 to 31 March 2017, then he can claim every year till the repayment of additional deduction loan up to Rs 50000 from the total income under section 80EE at its interest. This is in addition to the tax deduction up to Rs 2 lakh of section 24. There are some conditions for this additional deduction.
- There should be no residential property in the name of the person till the date of loan passing.
- The loan is taken between 1 April 2016 to 31 March 2017.
- The price of the house purchased should not exceed Rs. 50 lakhs.
- Home loan should not be more than Rs 35 lakh.
2. Rent if living
Under Section 80GG of the Income Tax Act, those people who do not get HRA (House Rent Allowance) with salary from their employer get benefit of tax deduction on the rent of the house. Taxpayer must be salaried or self-employed to take this tax benefit. The taxpayer or his wife or minor children or HUF, whose taxpayer is a member, should not have any residential property. Nor should there be any residential arrangements like quarters etc. for them at their place of work. In order to claim tax deduction under section 80GG, the taxpayer will have to fill Form 10BA along with details of payment of rent and submit it.
There are some standards for tax deduction on rent of a house under section 80GG, deduction will be decided on the basis of which will be the lowest. These standards are like this ..
- 5000 rupees per month
- 25% of adjusted income (long term capital gains under section 111A, short term capital gains; income under section 115A or 115D and without deduction under section 80C to 80U. Also before deduction under section 80GG Income).
- 10% of income minus actual rent
(By: CA Yogesh Agrawal)