Income-tax deductions on home loans made easy: Part 1

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One of the most sought-after income-tax deductions is on home loans. Every time you repay your home loan through equated monthly instalments (EMIs), you are entitled to tax deduction benefits. Your home loan EMI consists of two components — the principal and the interest on the principal. The principal component of your EMI qualifies for deduction under section 80C of the Income Tax Act, 1961, while the interest portion (in respect of a self-occupied property) gets you a further deduction of Rs 2 lakh, under Section 24b of the Act.

There’s more. You can claim additional deductions for interest payment on your existing home loan. Under Section 80EE, which was introduced in the Finance Act, 2016, you can claim an additional deduction of up to Rs 50,000 per annum against interest paid on a home loan, provided the property purchased is your first and you have taken a home loan to fund it. The caveat: your home loan should be up to Rs 35 lakh and sanctioned in the financial year 2016-17 for a house not costing more than Rs 50 lakh. This deduction is over and above the Rs 2 lakh deduction available under Section 24b.

Further, in finance act 2019, the government introduced an additional deduction under Section 80EEA for first-time home buyers on repayment of interest up to Rs 1.5 lakh for purchase of a residential unit costing up to Rs 45 lakh. The home loan should have been availed between April 1, 2019, and March 31, 2020. Since this deduction is available only to first-time home buyers, they cannot simultaneously avail of the Section 80 EE tax deduction (additional deduction up to Rs 50,000 per annum against interest paid).

Thus, the total deduction for repayment of interest on housing loans  (taken by first-time homebuyers between April 1, 2019, and March 31, 2020) can go up to Rs 3.5 lakh (Rs 2 lakh under Section 24 and Rs 1.5 lakh under the new Section 80EEA).

In this 2-part series, we tell you everything you need to know about maximising tax benefits on home loans. In Part 1, we take you through the basics of a home loan and the real benefits you can derive. Read on.

Can co-borrowers claim tax deductions on EMIs equally?

Many people borrow home loans with their spouses. Some add another family member instead of a spouse, mostly to enhance the loan amount eligibility.

Deepak Jain, chief executive, TaxManager.in, explains that each co-borrower can claim a tax deduction on the principal component of the EMI. The maximum deduction allowed is Rs 1.5 lakh per annum. “However, the combined deduction cannot exceed the actual amount of the home loan principal repayment made during the financial year”, he adds.

What if only one of the co-borrowers actually pays the EMIs? Can the other borrower then claim a tax deduction?

There may be a situation where one of the borrowers pays all or most of the EMI and the co-borrower contributes nothing or just a small amount. In such a case, the person who actually pays the EMI gets to earn the tax deduction. If you do not contribute to the EMI payments, you do not get to claim a tax deduction. If you contribute a small amount, the amount claimed has to be in line with the EMI contribution.

If I skip EMIs in a month or two, can I still claim deductions for those months?

Sometimes, people miss making payments because of cash-flow issues or an emergency. For instance, if you are feeling a bit squeezed financially, you might decide to skip paying EMIs in February and March and decide to pay them in April, along with that month’s EMI.

On the face of it, this looks harmless, but at the end of March, the financial year changes. And so, you cannot avail of Section 80C benefits — on home  loan principal repayment — if you skip paying your EMIs. The principal that is outstanding but not paid within the fiscal year cannot be claimed as a deduction. You can, however, claim deduction on the principal amount in the year the payment is made.

There is some respite. Unlike home-loan principal repayment, “deduction for interest on a housing loan is available on an accrual basis,” explains Sudhakar Sethuraman, partner, Deloitte India. Hence, interest accrued on a housing loan during the relevant financial year can be claimed as a deduction under Section 24(b).

Also read | Income-tax deductions on home loans made easy: Part 2

If a house is sold early on, will the tax deduction benefits availed of earlier still hold good? 

Section 80C clearly states that you need to hold on to your house for at least five years. If you sell the house before five years have passed and have already claimed tax deductions on your home loan, you will have to pay tax (on the amount on which deduction was claimed) in the year in which the house is sold. This tax is the sum of all the tax savings you had made on your home loan till that point.

My house is still under-construction and it has been 8 years. Can I still claim income-tax deductions on my home-loan repayment?

First things first, you cannot claim a tax deduction during the period a property is under construction. You can only get a tax deduction once construction is completed and you have taken possession.

However, delays in construction are normal and happen all the time. In many cases, it takes several years to get possession of your house.

Sethuraman of Deloitte explains that you can claim tax deduction benefits on EMIs paid during the construction stage, once the house/flat is complete and you have taken possession. All you have to do is aggregate the interest paid on the housing loan during the construction period and then claim a deduction once the construction is completed, in five equal instalments  (over five years). There is no limit / restriction on the number of years taken to construct a house. But Sethuraman warns that pre-construction interest has to be claimed within the overall limits specified under section 24(b).