The Home Loan repayment mainly consists of 2 components i.e. principal and interest component. Under Income Tax Act both these components brings tax benefits to the borrower on fulfilling some basic criteria.
Now lets look at some of the tax benefits available on Home Loan repayment:-
Under section 80C and 24b
Borrower can avail deduction of the principal amount of loan under section 80C up to a maximum limit of Rs. 1.5 lakhs including other eligible items like Life Insurance premium, contribution to Provident Funds, etc.
And under section 24b for the payment of interest on loan to the extent of Rs. 2 lakhs if the property is self occupied and in case the property is let out, then he can claim whole of the interest payable against the rental income in respect of such property.
Expense incurred for Registration Fee and Stamp Duty paid for a house is also eligible for deduction under section 80C up to an overall limit of Rs. 1,50,000/-
For Co-borrower / Co-owner
To be eligible for the tax benefits, the co-borrower should also be the co-owner to the property.
They can both claim the deduction for the home loan repayments in the ratio of their respective shares in the loan. Tax deduction benefits will be available for each of them separately under section 24 (interest payable on the loan) limited to Rs. 2,00,000/- for each of them if the property is self-occupied. Moreover they both claim deductions under section 80C to the fullest extent of Rs. 1,50,000/- for each of them (for the principal repaid) in the proportion of their share in the loan.
For Under-construction property
A borrower can get tax deduction benefit on home loan for under-construction property only from the financial year in which the construction of the house is completed irrespective of whether it is Pre-EMI or EMI on part payment. The interest paid during the period prior to the year of completion of construction will be allowable in five equal installments beginning from the year in which the construction is completed and possession taken. Any repayment of principal during the years when the property remains under-construction is lost forever.
For Loan taken from relatives or friends
For claiming deductions in respect of principal portion comprised in home loan installment, the loan should be taken from specified entities like Central or state government, any bank including cooperative bank, LIC, National housing bank, any housing company, any cooperative society engaged in providing loans for financing construction of house, employer which is a public company or public sector company or any university, etc.
However as regards to payment of interest on borrowed capital, there is no such restriction. And therefore, borrower can claim the deduction of interest payable u/s 24b up to Rs. 2 lakhs in case the property is self-occupied. In case the property is let out he can claim whole of the interest as deduction without any upper limit.
On second home loan
In case a person owns more than one property and both are either occupied by self or his relatives, the person has got an option to treat one of the properties as self-occupied. Once the option to treat a particular property as self-occupied is taken, the other property will be deemed to have been let out and a notional income equivalent to the rent expected to be realized on such property will be treated as rental income in respect of the other property.
The annual value of the self-occupied property is taken at nil and a person is entitled to claim interest payment for loan taken to acquire that property up to a limit of Rs. 2,00,000. He can also claim income tax benefit towards repayment of housing loan on both properties put together within overall limit of Rs.1,50,000 under Section 80 C.
The taxable income of the second property will be arrived by deducting actual interest payable in respect of such property without any limit from the notional rent taken above as well as 30% standard deduction.
Please note that owning 2 properties can have wealth tax implications. So consult your personal tax advisor.
On HRA and Home Loan
Borrower can claim both HRA and tax benefits in respect of home loan provided he is able to prove that he is staying in a premises not owned by him and he is actually paying rent for it. The claim of HRA is independent of his owning a house. Even he can own the house in the same city and take on rent another house and claim HRA benefits. What is important is that he should be able to prove that he is actually paying the rent for the house that does not belong to him.