Tax benefits of buying a house

Last Updated at: Nov 04, 2019
Tax benefits of buying a house

Tax benefits should be known to every individual who is looking to get a housing loan. The basic requirement for claiming the tax benefit is that the person who claims should be the owner of the property and also the loan borrower of the property. If a person bears any one of the title, he is not entitled to the claim. Even if the person is the joint owner of the property or the property is under the name of his wife or any other family member, they can’t claim tax benefit. The condition is that the person who pays the loan amount can only claim it. If the joint co-owners pay the loan interest separately, then they both can claim tax benefits according to their share of pay. Only individuals are entitled to tax benefits. The companies, partnership firm cannot claim the benefits. These benefits are given under Income Tax Act, 1961.

Income Tax Act

The Tax benefits on buying houses are given under Sec 24, Sec 80C and Sec 80EE of IT Act.

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Deduction from income from property

Section 24 of IT Act is known as deductions from Income from house property. Deduction for the paid interest on home loans can be claimed under this section. So income from the house property includes the rent received from the property and if the individual owns more than a house, other than self-acquired property all the properties are considered as the income from house property. The tax benefit of paid interest can be claimed for both pre- and post construction period. Pre-construction period interest starts from the date of borrowing and ends on the completion date/ on the date of loan repayment/ at the end of every financial year whichever comes first.

Once the construction is completed, the interest on a loan is known as Post construction period. These incomes are calculated after making the standard deductions and interest on borrowed capital. The standard deduction allows the taxpayer for a deduction of a sum equal to 30% of his net annual income. This deduction is not applicable to the self-occupied property. If the loan is borrowed for carrying out the construction, repairing or for acquiring the property, the interest paid for that loan is excluded while calculating income from house property.

  • For a self-occupied property, the maximum deduction is Rs 2 lakhs.
  • There is no limit for a tax deduction if the property is rented and not self-occupied. If the taxpayer resides at some other place for the purpose of employment then Rs 2 lakhs is allowed as a tax deduction
  • The tax benefit for interest on the loan is deducted on an accrual basis. The taxpayer has to calculate the payable interest for every year separately and claim the benefits accordingly.
  • If the construction is not completed or not acquired within 5 years (financial year) from the date of borrowing the loan amount, then the tax benefit of Rs. 2 lakhs is reduced to Rs 30,000
  • Any amount paid as processing fees cannot be included under this section.

Deduction on repayment of principal amount

Both Indian and NRI are eligible for tax deduction. The maximum deduction of Rs 1,50,000 can be availed for the repayment of Principle amount made under Sec 80C of IT Act. If the taxpayer paid more than Rs 150000, he can’t claim the tax benefit for extra amount. Only individuals can claim under this section. The following deductions which have an impact at the time of returns such as Life insurance policy, ELSS Mutual fund, Public Provident Fund (PPF), Employee Provident Fund (EPF), National Pension System, Senior Citizen Saving scheme, Home loan, stamp duty are covered under this section.

  • Only after the construction of property, the taxpayer can claim for the deduction on the repayment of the principal amount
  • The taxpayer cannot claim a deduction on the principal amount borrowed for renovation, alteration etc. It is applicable only for the purchase or construction purpose.
  • The borrowings should be done only from the financial institution defined under the IT Act. The deductions made for the repayment of borrowings from the individual doesn’t cover under this section.
  • If the taxpayer pays the principal amount, only then he is eligible for deduction under Section 80C
  • The individual should not sell the house for five years after claiming the deduction. If he does so, the amount will be taken back during the sale of the property.

Deduction for first-time buyers

Section 80EE of IT Act is exclusively for the first time home buyers. An individual is given an extra benefit of Rs. 50,000 as tax deduction compared to Section 24 when he pays the interest on housing loan. The tax benefits can be claimed only if he doesn’t own or have any property by his name.  This tax benefit of deduction is applicable only for individuals. Co-owner/ Joint owner are not entitled to a deduction. The individual can purchase for both self-occupied and non-Self occupied purpose.

  • The taxpayer should have borrowed loan only for buying residential property. He should not own any house before.
  • The property value should not exceed Rs 50 lakhs
  • Loan borrowed should exceed Rs 35 Lakhs
  • The individual should not possess any property by his name on the date of sanction
  • The individual should borrow loan only from the financial institution and not from any individuals
  • A loan should be sanctioned between FY i.e.1st April to 31st March.

For claiming the tax benefits, the person should calculate the amount of IT deduction and should submit the certificate of home loan interest and EMI statement as IT proof. If a person fails to submit the document, he can claim those benefits while filing IT returns. In the case of self-employment, they need not submit the documents. After deducting everything, the Income Tax slab is fixed for an individual.