Friday, September 4, 2015


There are various tax benefits available on a home loan. The benefits can be claimed on both the principal and interest components of a home loan as provided by the Income Tax Act. These deductions are available to assessees who have taken a loan to either buy or build a house, under Section 24(b).

Deduction on interest

If these conditions are met, interest on borrowed capital is deductible up to Rs.1.5 lakhs. The amount should have been borrowed on or after April 1, 1999 to acquire or construct a residential property.

The acquisition or construction should be completed within three years from the end of the financial year in which the amount was borrowed. The bank extending the loan, certifies that interest is payable on the amount advanced for acquisition or construction of a house, or as refinance of principle amount outstanding under an earlier loan taken for such acquisition or construction. If these conditions are not met, the interest on borrowed capital is deductible up to Rs.30,000.

For deduction on interest, the following conditions have to be met :

The amount should have been borrowed before April 1, 1999 to purchase, construct, reconstruct or repair a house. The amount has been borrowed on or after April 1, 1999, but the construction is not completed within three years from the end of the year, in which the amount was borrowed. In addition to these deductions, the principal amount is eligible for a deduction of up to Rs.1 lakh under Section 80C from the assessment year 2006-07.

The maximum deduction permissible in a financial year for an original loan (if any) plus for any additional loans taken is Rs.1.5 lakhs. Hence, if the assessee's deductions on existing loans are less than Rs.1.5 lakhs, he can claim further benefits on the additional loan taken, subject to an upper limit of Rs.1.5 lakhs in a financial year. It is to be noted that the tax benefits under Section 24 and deductions under Section 80C of the Income Tax Act can be claimed only when the payment is made. If an assessee fails to make EMI payments, he cannot claim tax benefits on the dues.

According to the Income tax Act, only the assessee who has taken the loan can claim tax rebates. The interest on a loan, taken for repair, renewal or reconstruction, also qualifies for the deduction of Rs.1.5 lakh. A husband and wife, both being taxpayers with independent income sources, can get tax deduction benefits on the same housing loan. In this case, the tax benefits are shared to the extent of the amount of loan taken in their respective names.

If it is proved that a home loan is simply an arrangement between a home buyer and builder or with a third party for the purpose of claiming tax benefits, the tax benefits will not be allowed, and benefits previously claimed will be clubbed with the income and taxed accordingly.

If a person buys a house and sells it in the same year or after three years, a capital gains tax liability arises on the profits. For example, if a person purchases a house for Rs.25 lakh with a loan and sells it in the same year for Rs.35 lakh, he makes a profit of Rs.10 lakh. On this profit, he will be liable to pay short-term capital gains tax since the sale took place in the same year. But, if the sale had taken place after three years, then a long term capital gains tax liability would have arisen. Long-term capital gains are exempted from tax if the profit amount (after factoring in the indexation benefits) is invested in capital gains, tax-saving bonds or in another house as specified under Section 54.

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