How do I get income tax benefits on home loan? What if I have purchased a second house- Am I still eligible for tax benefits? What are the income tax benefits on home loan if I wish to go for Joint/construction linked loan?
Housing Loan Tax Benefits -Budget 2014-2015
- Increase in deduction limit on interest on home loan for self-occupied property from Rs 1.5 lakh to Rs 2 lakh
- Increase in deduction limit on Principal on home loan from Rs 1 lakh to Rs 1.5 lakh(under Section 80C)
Most of us are now looking at investments in real estates, as a better option. If you speak to anyone, who has invested in a real estate property in the past 10 years, they will explain how the value of their flat is doubled or even tripled in couple of years!
Yes, real estate as an asset class is gaining momentum among investors. Whatever said and done, you require a house of your own. You can have a second property as investment, if your budget permits the EMI for a home loan.
Another major benefit of investment in property is the huge income tax benefits on home loan.
Let us see how it works for you?
If you are going for a flat worth 50 lakhs, you will be eligible for 80% of the cost as a home loan, provided you have the income to support the EMI and your credit score is good. Let us see the factors in the home loan.
In this case, you may get 80% of 50 Lakhs i.e. 40 Lakhs as loan. If you are opting for a 20 year term, the Equated Monthly Installment (EMI) will be 39,935 assuming the interest rate of 10.5%.
How the EMI works?
In the EMI of 39,935 there are 2 components, Principal and interest. In the initial years, the principal component will be negligible because the interest component will be very high. After repaying the 12 EMIs, the outstanding loan will be 39, 37,843, because only 62,157 will be repaid as principal while 4, 17,063 go towards interest! Slowly, the interest component will come down and principal will increase. At the later stage of the loan, the interest component will be less.
Income Tax Benefits on Home Loan
Income tax benefits on home loan can be divided in 2 components
- Principal component in EMI
- Interest component in EMI
The principal and interest component EMI will get different tax benefits.
Income Tax Benefits on Home Loan – Principal Component
You are eligible to claim tax benefits under Section 80C for the principal repayment of a home loan. You can claim deduction up to 1.5 Lakh along with all other permissible instruments like, life insurance premium, PPF, ELSS, NSC etc.
You are eligible for this benefit only if the loan is for a self occupied house. But if you are staying in another city for job and have house in another city, then you can claim this benefit even if the house is not self occupied.
Income Tax Benefits on Home Loan – Interest Component
Under Section 24 of the IT Act, you can claim deduction up to 2 Lakhs in a year for the home loan interest paid. The limit of 2 Lakhs is applicable only for the self occupied house. If you are going for a second house, you can claim the actual interest paid as deduction. The limit of 2 Lakhs is not applicable here.
Construction Linked Loan
If the loan is construction linked and if you are paying only Pre EMI interest, there is a change in the way you get tax benefits.
Pre EMI interest is not eligible for tax benefit, at the time of payment. But you can claim this in 5 equal installments after the construction of the house. The total interest paid at this stage can be claimed in 5 equal installments starting from the year in which you get possession. But please note that the limit is fixed as 2 Lakhs in a year in this case also.
If you pay EMI before occupation of the house
In this case, you will not get any benefit under Section 80C for the principal repaid before occupation of the house. You can claim the benefits under Section 80C only from the occupation.
For the interest paid before occupation, you will not get the tax benefits immediately. But the total interest paid before occupation can be claimed in 5 equal installments from the year in which you get the occupation. But the limit per year is 2 Lakhs.
Income Tax Benefits on Joint Home Loan
Though the tax benefit is limited to 1.5 Lakh under section 80C and 2 Lakhs in Section 24, you can get more benefits, if you go for a joint home loan along with your spouse. If you go for a joint home loan with your spouse in the ratio of 50: 50, then both of you can claim these benefits separately. So the limit will be 3 lakhs in Section 80C and 4 Lakhs in Section 24. This can reduce your cost of loan considerably.
So, enjoy the income tax benefits on home loan and congratulations for having your dream home.
Please feel free to ask if you have any queries regarding income tax benefits on home loan.