The end of financial year 2022-23 is a few months away and soon, salaried taxpayers will have to submit income-tax deduction, rebate and investment-proof documents to their employers. Among these documents will be proof of loans taken for the purchase of a home. Many taxpayers avail of tax-deduction benefits on home loans.
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.
Over and above this, you can also claim tax deduction under Section 80EEA if you are a first-time home buyer, 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. Budget 2019 had introduced this new benefit.
Thus, the total deduction for repayment of interest on housing loans 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 Part 1 of this special 2-part series, we dealt with the basics of home loan and income-tax benefits like how can co-borrowers claim tax deduction benefits, what happens if you skip an EMI and many more questions.
In the second and concluding part of this special series, we continue to bust your myths about home loans and taxation and give you more details on how to maximise the tax benefits on a home loan.
Can I claim a deduction for home loans taken for multiple houses or there is a limit on the number of houses?
Some people buy more than one house, at different points of time, and pay the respective home loans simulatively. Under Section 80C, where you claim income-tax deduction to the extent of the principal repaid, there is no limit on the number of homes on which you repay your home loan principal.
But if you claim a deduction under Section 80EE (the section introduced in Budget 2016 to help taxpayers buy low-cost housing), and also Section 80 EEA, then the maximum number of house properties that can be owned is one. It has to be the only property owned by the taxpayer. Even if s/he has another property that was inherited or purchased without a loan, s/he is ineligible.
Also read | How to maximise your tax savings on your house property income
In other words, if a taxpayer owns more than one house property, deduction under Section 80EE or Section 80EEA is not applicable, while deductions under Section 80C and 24(b) can be claimed.
Can I take a loan from a different bank, a financing firm or a loan app and claim the income-tax deduction?
Banks do their own due diligence before sanctioning a loan or the amount of a loan. In many cases home buyers approach other sources when they don’t get a bank loan or there is a shortfall. In such cases, there are ambiguities on whether they can still claim the deduction or not.
Also read | Did you know that your income-tax benefits once claimed, can be taken away?
“For claiming deduction of interest under the house property income, one can take a loan from anyone. However, deduction of the principal under Section 80C is allowed only when the loan is taken from a bank or a financial institution,” said Sandeep Sehgal, Partner-Tax, AKM Global, a tax and consulting firm
Can I take a loan from an employer and claim the income-tax deductions?
Many home buyers also prefer to take a loan from their employers to buy a home. You can claim income-tax deduction benefits on the home loan interest. However, the principal is allowed as a deduction only in a few cases, where your employer is a publicly listed company, a public sector company, a university established by law or a college affiliated to such a university, a local authority, a co-operative society and so on, as Sehgal elaborates.
Can I claim deduction for principal repayment against an interest-free loan from friends and relatives? And on interest if I am paying interest on the loan to said friends and relatives?
To save interest and to possibly meet a shortfall in funding, some people borrow from friends and family. The rules, however, remain the same.
You cannot claim deduction in terms of principal repayment. But the EMI portion that consists of interest repayment is eligible for tax deduction, provided your documents are in order. The onus is on the taxpayer to prove that the loan taken is genuine and that you are repaying it. “Deduction shall be allowed only if appropriate TDS has been deducted,” adds Sehgal.
Can I claim a deduction against repayment of top-up home loans?
Many banks offer top-up loans over existing home loans. Typically, a top-up loan is meant for renovation and house repairs. But you could also take a top-up loan for other purposes.
The purpose for which you use your top-up loan will determine if it is eligible for a tax deduction. If the nature of the loan is the same — that is to buy or construct a home — you can get the deduction benefits. However, if the loan is taken for repairs, reconstruction, etc. the amount of deduction for interest is capped at Rs 30,000. No deduction is available on the principal.
(This is the second and concluding part of our primer on availing income-tax deductions on home loans. To read Part 1, click here.)
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