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Home Loan Tax Benefits – Section 24, 80C, 80EE

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Buying a house without home loan is distant dream for most of the people.  But even if you have required funds to buy house, taking home loan can be tax efficient. You can save significant amount of tax on the principal repayment of home loan as well as Interest paid on home loan.

In this post, I will try to explain the tax benefits associated with home loan.

Section 80C – Deduction upto Rs 1.50 lakh for Principal repayment
Under Section 80C, you can claim deduction upto Rs 1.50 Lakh by way of investment in eligible items – Home loan repayment is one of the eligible items.  Read more on 80C deductions

  • The deduction is only for residential house property and not for commercial property.
  • It is available only for purchase or construction of a house and not for renovation, additions or repairs on any existing house property.  You can claim deduction u/s 80C even for under-construction properties.
  • If  you sell the house acquired with home loan, within 5  years from the end of the year in which possession of the house was taken, all the deduction allowed for Principal repayment in earlier years shall be withdrawn. This shall be treated as income of the year in which this property is sold. Also,  no deduction u/s  80 C shall be allowed for principal repayment made during the year.

Please note that you may exhaust the 80C limit by investing in other options.

Section 24 – Deduction for Interest Payment
Section 24(b) of the Income Tax Act allows you deduction for interest payable on loan taken to buy or construct a house property, or even for repair or reconstruction of an existing property.

  • This benefit is available for residential and commercial property as well.  
  • Processing fee paid in respect of home loan and any prepayment fee shall also be treated as interest and can be claimed as deduction u/s 24.
  • You can deduction even if the loan is taken from your friends and relatives besides banks and financial institutions.
  • There is no reversal of interest benefit even if you sell the house before five years as is applicable for repayment benefits.
  • The deduction is available for self-occupied as well as let-out properties too.   The property will be treated as self-occupied property (SOP) or let-out property (LOP) or deemed to be let- out property (DLOP).

For self -occupied property,  the deduction is restricted to Rs. 1.50 lakhs p.a.   Rs 2 lakhs  (increase in Budget 2014 from 1.5 lakhs to 2 lakhs)

For let-out property – you can claim FULL interest.

If you have more than one self- occupied houses–  you have to select one house as self-occupied and the other house/s shall be treated as let-out. For the house treated as let out , you can claim FULL Interest as deduction.

For under construction property –  you can only claim the interest deduction from the year construction is complete and possession taken. However in respect of interest paid for the period prior to the year for taking possession, you can claim aggregate of such interest in 5 equal installments from the year in which construction is completed.

Section 80EE – Additional deduction upto Rs 1 lakh for Interest
Section 80EE allows you to claim additional deduction upto Rs 1 lakh for interest payable on housing loan.  This deduction is available for individuals for AY 2014-2015 (FY 2013-2014) where the Value of residential house does not exceed Rs. 40 Lakhs & Loan sanctioned does not exceed Rs. 25 Lakhs. Also, loan should be sanctioned between the FY 1/4/2013 and 31/3/2014.
Assessee should be first time home buyer and does not own any other residential house as on the date of sanction of the loan.
Read – 80EE Deduction

Summary

If you are in high tax bracket (30%), taking the home loan for 2nd property or let out may be beneficial than buying the property without home loan. For self-occupied property, you need to do calculation to see if this is beneficial as Interest deduction is allowed only upto Rs 1.50 lakh.

Assuming that you pay 10.5-11% interest on your home loan, which after adjusting for tax, will be around 7.50% . So actually you are getting home loan at 7.50% (post tax benefit).

You can invest the surplus funds in tax efficient options (for e.g Tax free bonds yielding around 9%), thereby maximize your earnings.

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