Call Everything about Income Tax Deduction on housing loan
In India, every person who dreams to buy a home has the helping ladder of housing loan finances. Home loans not only give financial assistance to buyers but it also provides several tax benefits to taxpayers. Buying a house will also be one of the most important long term investment that ne make at the same time enjoying multiple tax benefits provided by income tax act, 1961.
It is very important to know that both the part of the housing loan EMIs i.e. interest as well as principle part gives tax benefits to the taxpayers. We will dive deep into understanding how buying a house on housing loan will help taxpayer in asset creation as well as in tax planning.
Interest paid on housing loan:
Section 24 of the income tax act has specified certain deductions from income from house property. Under these deductions comes the interest on housing loan. Income tax has divided types of properties in 3 categories i.e. self occupied, let-out or rented property and deemed let out property. Let us understand how interest on home loan deduction is treated under every type of property.
- Self-occupied property:
House property owners are eligible to claim a deduction upto rs. 2,00,000 on their home loan interest if the property is self-occupied by them. Previously, only 1 house property was allowed to be a self-occupied property, if a person has more than one house property. From the FY 2019-20 and onwards, the benefit of considering the houses as self-occupied has been extended to 2 houses. Now, a taxpayer can claim his 2 properties as self-occupied and the remaining house as let out for Income tax purposes. - Let-out property:
Let out property refers to any property given on rent to any other person and such rental income is received from such person. Any interest paid on such let out property is allowed as deduction. The limit of Rs.2,00,000 does not apply in this case as it applies in the SOP case. - Deemed let-out property:
If a person owns more than 2 house properties and those remain vacant, then they are called as deemed let-out properties. Tax treatment for such properties remains same as that of are for let-out properties. Entire interest is allowed as deductions on such properties.
Your deduction on interest is limited to Rs.30,000 if you fail to meet any of the conditions given below:
- Loan taken must be for purchase or construction of a property
- Loan is taken on or after 1st April, 1999
- The purchase or construction must be completed within 5 years from the end of the financial year in which the loan was taken
There are section 80EE and 80EEA which provides deduction in case of interest on housing loan, over and above the limit mentioned in section 24 only if certain specified conditions are satisfied.
Applicable to old regime:
Interest deduction under section 24 is available to self-occupied properties only if the old tax regime is opted at the time of filing Income tax return.
Section 80C allows a deduction if you have made any principal repayment of a loan for your house property, including a payment of stamp duty, and registration charge.
Applicability of interest deduction in New Tax Regime:
In the new tax regime, “Interest on borrowed capital for Self-occupied property” is not allowed as a deduction from Income from House property as per the provision of Section 115BAC of the Act, 1961. In case, the Taxpayer wants to claim deduction of interest on borrowed capital for SOP, then taxpayer must choose ‘Old Tax Regime’ by selecting “Yes” in ITR 1 / ITR 2 or “Yes, within due date” option in ITR 3 / ITR 4 / ITR 5 in the field provided for “opting out option” in the ITR Form.
However, interest deduction is allowed with no ceiling limit for interest on loans borrowed for let-out and deemed to be let-out property irrespective of the tax regime.
Conclusion:
Interest on home loan is one of the highly utilized tax saving tool by salaried as well as business and professional individuals. However, the tax regimes and types of properties also determine the applicability of this deduction. Under old regime the deduction amount is restricted for self-occupied properties whereas the same is not allowed at all in new tax regimes. Whereas, in case of let-out and deemed let-out properties no ceiling limit on interest deduction or no tax regime criteria is a factor for applicability of interest deduction.
About Author:
CA Chinmay Shirish Agate
Chinmay Agate is a Practicing Chartered Accountant having 4+ years of experience and expertise in the field of Direct Taxation and Auditing compliances. In the past, he worked in various CA firms and comes with wide industry experience from services, retail to manufacturing to trading where he has handled various complex assignments. He has keen interest in Forex and Derivative knowledge as well as fundamental analysis.