Taking a home loan can be considered as one of the biggest financial decisions of most people. But looking at the total interest expense which is likely to be paid over the entire period of the loan, the amount could be quite significant. Of course, many ask whether the interest paid on home loans is a tax-deductible expense and may help reduce the actual tax liability. Let’s look at this in more detail.
One important aspect concerning home loan that must be discussed here is Tax Deduction on Home Loan Interest
The good news is that the interest part of your home loan EMI is tax deductible under section 24 of the Income Tax Act of India, however, certain conditions do apply. This goes a long way in reducing the amount of taxable income in your account by helping to offset the expenses.
This is because in order to claim tax deduction, the home loan has to have been availed for the purpose of purchasing or constructing residential house property. This should be in the name of the taxpayer claiming deduction or in name of spouse/kids. Moreover, the taxpayer s should not own more than two house properties.
Deduction Calculation and Limits
You can avail deduction on interest paid on pre construction interest, interest during construction and on the home loan taken after getting the possession. Interest expenses can be claimed under deduction in the year of reckoning.
The maximum limit of tax exemption on the house property is Rs 2 lakh in a year. This overall limit encompasses both principal and interest component of the loan.
Within this, deduction on home loan interest is allowed only for self-occupied house property up to Rs 2 lakh and in the case of let-out property, the deduction is restricted to Rs 30,000.
Hence, in case of a single home loan for a self-occupied house, you can offset the entire interest paid or Rs 2 lakhs whichever is lower. And all principal repayment allow for deduction up to the extent of Rs 2 lakh in aggregate.
Extra Concessions for the First Time Home Buyers
To give a boost to affordable housing, an incentive above Rs 2 lakh has been given for first-time home buyers availing home loans during the financial year 2020-21. This additional relief of up to Rs 1. 5 lakh is available for loans availed till March 31, 2022.
Here, this additional deduction should be for house property and the value of the house should not exceed Rs 45 lakh in metro cities or Rs 40 lakh in other places. Besides, it further improves the overall deduction to Rs 3. 5 lakh for first home buyers in such cases.
The following are Key Points when claiming deduction:
Here are some key things to note when claiming home loan interest deduction:Here are some key things to note when claiming home loan interest deduction:
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The house construction should be completed within 5 years from the end of the financial year when the loan was taken
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Deduction can only be claimed once construction is complete
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For pre-construction period interest, deduction can be spread equally over 5 years or deduct fully in year of completion
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For pre-construction interest expense, a certificate from the lender is mandatory.
- Likewise, co-applicant spouse can also claim the deduction for their income share if he/she has documentary proof.
Another factor that affects the deduction is change in circumstances that affects the computation of the income.
They conclude that your home loan interest deduction is also influenced by external factors that, if altered, will affect the benefits.
For example, if the property becomes let-out, deduction limit drops from Rs 2 lakh to just Rs 30,000. Likewise, if you have found yourself with more than two house properties, you will lose the deduction. Another condition which affects deduction is transfer of property before 5 years of acquisition or carry forward of construction period beyond 5 years.
Litigation pending on some of these aspects has also raised uncertainty for taxpayers. The decision on such matters is still unclear depending on the results of such court cases that may still be pending.
To Conclude
Current tax provisions do offer significant tax relief on home loan interest payments. This can lower tax outgo substantially, especially in initial years when interest portion in EMIs is larger. End use conditions must be preserved and supporting documentation to facilitate the process of claiming for the deduction in every fiscal year. However, other factors are outside the campuses work and may also change your eligibility. Therefore, the following factors should be taken into account while planning your financial future.
