Tuesday, 5 June 2012

Income Tax Exemption on Housing Loan

Investment in house property is considered to a good investment as the property price rises annually and one can earn handsome money by way of investment in house property. On the other hand what makes investment in house property more attractive is the significant tax exemption available on repayment of home loan.
As per Sec 24(b) of the Income Tax Act, 1961 in India a deduction up to Rs. 150,000 can be claimed as tax exemption on housing loan. This deduction is claimed towards the total interest that we pay on the home loan towards purchase or construction of house property while computing the income from house property.

Loss from House Property in case of self occupied property:

Suppose a person purchase or constructed a house property by taking a loan from any financial or non financial institution. He is require to pay EMI for repayment of the loan & each EMI must contain principal or interest or both as per rule.
Suppose the person use the above property for his own residence as self occupied property.
As per sec 24(b) of the Income Tax Act, 1961, the maximum amount of interest allowable in case of self occupied residential property is Rs. 1,50,000 (if the loan is taken on or after 1st April, 1999) or Rs. 30,000 (if the loan is taken before 1st April 1999).
Hence, during repayment of home loan any amount paid for interest on loan is to be taken as loss from house property & to be set off as current year loss to the extent of limit u/s 24(b) from any income from Salary or Business or Profession or any other sources.

Some important points regarding deduction of interest on home loan:

1.       Deduction of interest u/s 24(b) is made only to the extent of interest payable during the year.
2.       Interest payable on outstanding interest is not deductable.
3.       Deduction for interest on loan u/s 24(b) is allowable to the assessee who took the loan for construction or reconstruction but not allowable to the successor of the property.
4.       If the tax payer takes the fresh loan to close the earlier loan, the interest paid on fresh loan is also to be set off as current year loss u/s 24(b).
5.       If any person & his/her spouse jointly took a house building loan & if both are assessable under income tax act, 1961, they can claim maximum amount of deduction of Rs. 1,50,000 in each file, total interest paid or payable during the year is to be apportioned between the co-owners.

Deduction for interest on House Building Loan in pre- construction period:

If loan is taken before construction, interest paid or payable in pre-construction period and before acquisition of the property. Deduction should be allowed on total interest in five equal installment starting from the year construction or acquisition is completed.

Principal repayment of the home loan

As per the newly introduced Sections 80C read with section 80CCE of the Income Tax Act, 1961 the principal repayment up to Rs. 100,000 on your home loan will be allowed as a deduction from the gross total income subject to fulfillment of prescribed conditions.