Archit Gupta
Purchasing or constructing a house property via a home loan comes with tax benefits. Most of us know deduction can be claimed for home loan interest; the Income Tax Act allows certain other tax benefits too. Let’s take a look at all the tax savings that can be claimed.
Before we discuss how interest is claimed, it is important to understand how to calculate income from house property.
Gross Annual Value (nil in case of Self Occupied Property or Rental Value if rented)
Less: Municipal Taxes paid
= Net Annual Value
Less: Standard Deduction (30 percent of Net Annual Value)
Less: Deduction for Interest on home loan
= Income from House Property
For a self-occupied house property
In case of a self-occupied house property the gross annual value is nil. And therefore, the only item you can claim is the interest on loan. This results in a loss from house property income. This loss can be adjusted from income from salary, other sources, or any other income in your tax return. Your tax outgo is lowered due to this loss claimed. Maximum deduction allowed for home loan interest for a self-occupied property is Rs 2 lakh for FY 2016-17 and is the same for FY 2017-18.
For a rented property
In case of a rented property the gross annual value is the rent collected, you can deduct property taxes paid by you and claim the standard deduction of 30% and then deduct interest on home loan. Where you own more than one house property, only one of them is allowed to be treated as self-occupied. All others are treated as rented, and tax must be paid on rent actually collected or where it is assumed to be rented, on estimated rent. The choice of which property you must consider as assumed to be rented is left to you.
Up till FY 2016-17, you are allowed to claim the entire interest of the home loan for the year against the rental income, with no limits. Loss so incurred can be set off from other heads of income. This can reduce your tax liability significantly.
However starting FY 2017-18, maximum loss set off from a rented house property against remaining income is limited to Rs 2 lakh. Any left-over loss has to be carried forward and claimed in the following eight years. However, subsequent claim of loss is nearly impossible for an ongoing loan, since every year the set off limit is Rs 2 lakh and it basically ends up being a dead loss.
Other things to keep in mind
If home loan is availed against under construction property, the tax benefit of the interest payment is available only when the construction is complete. Construction must be completed within five years from the end of the financial year, in which loan is taken.
You must be an owner of the property to claim this deduction and also a borrower in the loan.
In case you have made a principal repayment during the financial year (check your loan installment/interest certificate), you can claim this amount under Section 80C. However, the total amount allowed to be claimed under section 80C is limited to Rs 1.5 lakh.
The deduction towards home loan interest is Rs 2 lakh when taken for purchase or construction and Rs 30,000 when loan is taken for repair or reconstruction.
You must obtain an interest certificate from the lender to claim deduction for interest on the loan.
Deduction is also available on the stamp duty and registration charges that are paid on purchase of a property. This deduction is also covered within the overall limit of Rs 1.5 lakh under section 80C. It can be claimed in the year in which these payments are actually made.
The writer is Founder & CEO of ClearTax.com
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