To the disappointment of loan borrowers, the Supreme Court, on March 24, pronounced its judgement on the six-month loan moratorium period stating that it cannot allow waiver of complete interest and extension of the moratorium. Nevertheless, the comforting prospect of claiming a deduction that will reduce your income tax still remains.
Following are the deductions that will help you lower your income tax liability if you have extended a loan:
Home loan
Principal Amount
If you have availed a loan for the purposes of purchase or construction of a residential house, the principal portion of the instalment paid can be deducted under section 80C upto Rs 1.5 lakh. However, the deduction is conditional and can be availed if the house is not sold within five years from the date of the end of the financial year in which possession of such property is received. In case the house is sold within five years, then the deduction claimed will be added back as income in the year of sale.
Interest Amount
The Income Tax Act covers not only the principal amount as a deduction but also the interest on the loan. Section 24 allows a deduction upto Rs 2 lakhs provided the construction or purchase of the house should be completed within five years from the end of the financial year when the loan was taken. It is important to note that the deduction is allowed to be claimed after the house is purchased or constructed.
Usually, home loan is taken prior to the construction of the house or the purchase but the loan repayment begins immediately after the loan is taken. To address this issue, the Act provides for a deduction for the interest paid during this time. Section 24B allows a deduction to be claimed on interest payable for five years in equal instalments from the year in which the house is bought or the construction is completed.
An unrestricted amount of deduction can be claimed for the interest payable if the same house is rented out.
Affordable Housing
If you are a homeowner who acquired a residential property through a loan from a financial institution in financial year 2016-17 or 2019-20 and are still paying interest on that loan, then that interest can reduce your taxable income.
The interest payable on the loan upto Rs 50,000 can be claimed under section 80EE of the Income Tax Act. Do not worry if you skipped paying the interest in the last year due to any reason whatsoever including the distress of the ongoing pandemic, you can still claim this deduction.
The actual disbursement of the loan is irrelevant if the loan is sanctioned within due time (FY 2016-17).
However, the following are caveats should be noted that would make you eligible for claiming this deduction:
- The amount of loan sanctioned for acquiring the residential house should not exceed Rs 35 lakhs.
- The value of the residential house does not exceed Rs 50 lakhs.
- An individual should not own any other residential house on the date of sanction of loan.
This deduction can be claimed even if the house is under construction or if the registry has not taken place in your name or you still have not received the possession.
Not eligible to claim the deduction in the abovementioned section? Do not worry! There's another one.
Under section 80EEA of the act, you are eligible for a deduction of upto Rs 1.5 lakhs for low cost housing loans sanctioned from a financial institution in the financial year 2019-20. In order to extend the benefit of 'Housing for all,' the government introduced this deduction in Budget 2019.
The three caveats will apply here as well but with a few modifications:
- The loan should be sanctioned between April 1, 2019 to March 31, 2020.
- The stamp duty value of the residential house does not exceed Rs 45 lakhs.
- An individual should not own any other residential house on the date of sanction of loan.
For all of you who did not manage to pay back the loan instalments in the last year due to reasons including pandemic woes, there is a piece of good news.
The interest amount 'payable' is of the essence here and not the actual interest 'paid,' meaning that the deduction can be claimed irrespective of the amount actually paid on the loan in the financial year. It is important that the liability to pay the amount should exist at the time of claiming the deduction.
Stamp DutyThe Stamp Duty, registration fee and other expenses for the purpose of transfer of such house property are also deductible under section 80C further reducing the tax liability. The maximum amount that can be claimed under this section is Rs 1.5 lakhs, including all other deductions in this section.
Own an electric vehicle?
If you are one of the few electric vehicle owners in the country, the government has provided you with an extra deduction on the interest payable on that vehicle loan.
Under section 80EEB of the act, you are eligible for a deduction of Rs 1.5 lakhs for the interest payable on a loan taken from a financial institution for the purpose of buying an electric vehicle. The deduction is conditional on the date of sanctioning of the loan which should be from April 1, 2019, to March 31, 2023.
For deduction on education loans, refer to part 1 of the series.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
