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Last Updated : Sep 18, 2015 12:05 PM IST | Source: Moneycontrol.com

Your housing loan tax benefit depends on reason for loan

Housing loan can be taken for the purchase of a house or for the repairing of the house. And depending on the reason, the tax benefits change.

Arnav Pandya

Most people look at the interest cost on their housing loan and look at the benefit of Rs 2 lakh that they will get in terms of a deduction for the interest on the repayment of the loan. There is a need to be careful on this front because the benefit available can change. The actual reason for which the loan has been taken that is important as this will determine the extent of the tax deduction that one will be able to take for the interest component. Looking closely at these details will ensure that there is no problem as far as the overall position is concerned and that it does not put a large tax burden on the individual at a later date.

Twin benefits

There are two benefits that an individual is able to take on the tax front when they have a loan that they have for housing purposes. The benefits start when the equated monthly instalment is paid on the loan. The first benefit is for the interest component of the EMI paid and the second deals with the capital repayment that has taken place during the year. The interest is allowed as a deduction and so is the capital but what is the crucial part in the whole working is the amount till which the deduction can be made.

Interest deduction

Most people do not pay attention to the purpose for which the loan has been taken and they assume that a housing loan will give the same benefit to the individual. This is not the case and hence there has to be some element of care taken on this front. The interest deduction benefit is Rs 2 lakh if the loan has been taken for the purpose of purchasing the property. For a lot of the people the loan is for the purchase and hence this does not become an issue as all that they have to do is to look at the interest component on the repayment during the year and then they will be able to claim the benefit. However most people assume that if there is a housing loan then the Rs 2 lakh benefit will apply but this is not actually the case as the situation will vary.

If the housing loan is taken for the purpose of actually repairs or renovation or reconstruction of the house then the calculations for the tax benefit will actually change. This is crucial for the individual because there is a lower limit that is present which stands at Rs 30,000 for this benefit. This means that if the use of the funds is for the renovation of the house then the interest paid will be eligible for the tax benefit only for the lower amount and not for Rs 2 lakh.

Capital repayment

The difference that is seen is just with respect to the interest repayment on the loan because there is no change on the capital repayment benefit. The capital that is repaid on the loan is part of the long list of items that are eligible for a deduction under Section 80C and hence they fall within the limit of Rs 1.5 lakh. This does not change no matter what is the purpose for taking of the housing loan and hence there is a continued benefit under this front. However one has to be a bit realistic because of the fact that there are usually other investments that already complete the Rs 1.5 lakh limit and hence few people actually use the Section 80C benefits for the capital repayment that they have undertaken on their housing loan. This is just a small consolation at the end of the day for the individual as they tally up their benefits on the tax front.
First Published on Sep 18, 2015 12:05 pm