Home Loans and Income Tax Benefits – Part 1

July 2, 2013

Home Loans, Income Tax

This post is compilation of all the information related to home loans and income tax benefits on taking the housing loans. This will be a one stop guide for all your queries about income tax benefits on home loans. In my earlier articles, there are plenty of articles published on the home loans. However, this article would be more comprehensive on collating all the details scattered on various sources. If you have any questions, please write it in the comments section.

Home Loans and Income Tax Benefits

There are two sections in the Income Tax Act 1961 talks about the tax exemptions on the home loans. First one is section 80C which is for the tax exemption on home loans principal and second one is section 24B which is tax exemption on the interest payment on the home loans. If you are interested in benefiting on tax exemptions for home loans, you have to learn these two sections.

    • All about home loans ( This article explains various topics in the home loans with link to the suitable articles. One stop resources for home loan queries)
    • ITR – 1 (ITR 1 is the most widely used returns types for the individuals, read this article to know more details about the income tax return – 1)
    • How to be Your Own Financial Planner in 10 steps (It is a recommended book for learning basic ideas on financial planning)

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Home Loans Principal Payment (Section 80C)

  • This section has the ceiling of Rs. 100000 tax exemption for the various investments, that includes home loans principal payment
  • Tax payer can exempt up to Rs. 100000 as the home loans principal. If he/she claims the maximum limit, then he/she can not use other investments on this section.
  • This maximum limit is for the any number of houses. For example, if you have three houses, then also the total exemption allowed is Rs. 100000.
  • Another important point is, this exemption is valid only for the self occupied property. This restriction indicates that only one house is eligible for the tax exemption under section 80c.
  • Example:
    • If you have insurance premium payment Rs. 30000 and home loans principal payment Rs. 100000, then total amount eligible for the tax exemption is Rs. 100000. The excess amount will not be considered.

Home Loans Interest Payment (Section 24B)

  • This section has the provision to claim tax exemption for the interest payment towards the home loans.
  • If you have self occupied property, then you are eligible to claim maximum of Rs. 150000 as the tax exemption.
  • If you have rented out your property, then total interest payment is exempt from the income tax. For example, if you have rented out property for which you are paying Rs. 250000 as the interest payment every year. The whole amount is deductible for the tax exemption.
  • It is important to note that only one property has to be shown as the self occupied property at the time of tax returns.
  • For the self occupied property maximum limit on tax exemption is Rs. 150000 and there is no limit on the maximum exemption for the rented out house.
  • If the second house is not rented out or relatives are staying that house, tax payer has to consider that it is rented out and show a nominal rental income for that house. It is important to consider that, if you have more than one house then it is considered as rented out.
  • The interest payable for the pre-acquisition or pre-construction period would be deductible in five equal annual installments commencing from the year in which the house has been acquired or constructed.
  • The interest towards home loan taken for purchase, construction, repairs, renewal or reconstruction of house property is eligible for deduction under section 24(b).
  • Examples:
    1. If you have two houses one is self occupied which you are paying Rs. 200000 as the interest payment and another house which is rented out for Rs. 10000 per month and you are paying the interest of Rs. 250000 annually. In this case, for the first house eligible amount is Rs. 150000 as that is the maximum limit for the self occupied property, for the second house it has to be rental income and interest payment adjustment which is (Rs. 120000 – Rs. 250000) Rs. 130000 is eligible to claim as tax exemption.
    2. If you have two houses, in that one house is vacant and there is no income from that house. But, you are paying Rs. 300000 as the yearly interest payment. In this case, you have to consider the notional rental income and show that as the income from other resources.  Also claim Rs. 300000 as the tax exemption. There is no limit for the tax exemption on not self occupied property.

Joint Home Loans and Tax Benefits

Joint home loans are best suitable for increasing your loan eligibility. If both are working in a family, you can utilize the gross income of your both the salaries and apply for the joint home loans. If you club all the income in your family, it is most likely that the total loan eligibility would be higher. Also repayment can be shared among your family member. The following are the points to consider while applying for the joint home loans:

  • Joint home loans can be applied by minimum of 2 and maximum of 6 persons can apply together.
  • However when there is are many co-applicants, there is restrictions for the co-applicants:
    • A Joint Home Loan can be taken by Husband and Wife or Parent and Child.
    • Friends cannot take Joint Home Loans.
    • In some case brothers are allowed to take the Joint Home Loans.
    • Banks insist that, co-owners must be co-borrowers for the Home Loans. It is not necessary that all the co-borrowers must be the co-owners of the house.

Please read joint home loan tax benefits for more details.

In my next article I will explain about the various types of home loans and how to get the income tax benefits from the all types of home loans. I hope this article would have helped on understanding the basic idea on individual and joint home loans benefits. If you have any thoughts, please write it in the comments section.

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