Income Tax Benefit on Home Loan: Section 24, 80C & 80EE

Announcements made in budget 2016 have been incorporated in the article.

Buying your first house on a loan comes with multiple tax benefits. These deductions not only reduce your tax outgo but also help in managing your cash flows better.

Tax Benefit on Home Loan can be divided into three components:

  1. Deduction available under Section 80C for Principal repayment of home loan
  2. Deduction available under Section 24(b) for Interest payment
  3. Deduction available under Section 80EE (only for Financial year 2016-2017, as announced in budget 2016)

Interest + Principal = EMI

Deduction available under Section 80C for Principal repayment of home loan

The amount paid as Repayment of Principal Amount of Home Loan by an Individual is allowed as tax deduction under Section 80C of the Income Tax Act. The maximum tax deduction allowed under Section 80C is Rs. 1,50,000.

This tax deduction is the total of the deduction allowed under Section 80C and includes amount invested in various components like PPF, Life Insurance etc.  However, tax benefit of home loan under this section for repayment of principal part of the home loan is allowed only after the construction is complete and the completion certificate has been awarded. No deduction would be allowed under this section for repayment of principal for those years during which the property was under construction.

Divided opinion over exemption for under construction properties

Various Chartered Accountants and experts have divided opinion on the validity of availing tax exemption for under construction properties. Even the corporates are divided over this and finance department of many big IT companies consider principal repayments for under construction properties under section 80C. If you are a private salaried individual, it is better to check with the finance department of your company or your CA.

All tax benefits claimed for principal repayment will be reversed if the property is sold within 5 years of completion of the property.

Deduction available under Section 24(b) for Interest payment

In addition, to deduction for Principal, Section 24(b) of the Income Tax Act allows you deduction for interest payable on loan taken to buy or construct a house property, or even for repair or reconstruction of an existing property.

This benefit is available for the residential and commercial property as well.  It may be interesting to note that even processing fee paid in respect of home loan shall also be treated as interest so you can claim the deduction in respect of processing fee paid for taking such loan. Even in cases where you prepay your loan, you will be entitled to claim the amount of any prepayment fee paid to the bank for such prepayment. Here you can claim the benefits in respect of loans taken from your friends and relatives besides banks and financial institutions.The deduction is available for self-occupied as well as let-out properties too.

It must be noted that tax benefits under section 24(b) can only be claimed if the construction of the property is complete and completion / possession certificate is issued.

Self -Occupied property

  • For self -occupied property, the deduction is restricted to Rs. 2 lakhs p.a.  
  • If you have more than one self- occupied houses, you have to select one house as self-occupied and the other house/s shall be treated as let-out. In this case, you have to offer notional rent for taxation and can claim the full interest payable. So in order to maximize your tax benefits, it is always advisable to treat the property on which interest is lower as self-occupied in case interest payable on any or all of the property is more than Rs. 2.0 lakhs.

Let-out / Rented property

For let-out property, you can claim full interest.  

Under construction property

For under construction property you can only claim the interest deduction from the year construction is complete and possession taken. However in respect of interest paid for the period prior to the year for taking possession, you can claim aggregate of such interest in five equal installments from the year in which construction is completed. There is no reversal of interest benefit even if you sell the house before five years as is applicable for repayment benefits.

Note: If a house to be used by the buyer is not handed over the by the builder “within three years from the end of the financial year in which capital was borrowed”, the exemption on the interest amount will only be Rs 30,000.

Update 3/3/2016: This limit has now been increased to 5 years from existing 3 years. However, this will be applicable from FY 2016-2017 only.

Additional deduction available under SEC 80EE (First-time buyers)

In the budget proposal for the financial year 2016-2017, the finance minister has introduced section 80EE which offers an additional deduction of 50000 for interest on the home loan the first time home buyers.

This additional deduction of 50000 under section 80EE would only be available under following conditions:

  1. This deduction can only be availed when the property cost is less than 50 Lakhs.
  2. The home loan availed should be less than 35 lakh.
  3. The home loan should be sanction between 01/04/2016 to 31/03/2017.
  4. This is only applicable for financial year 2016 – 2017 or assessment year 2017 – 2018.

5 thoughts on “Income Tax Benefit on Home Loan: Section 24, 80C & 80EE

  • January 20, 2016 at 2:07 pm
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    Principal repayment under 80c can be availabled even if property is currently under construction. There is no clause of completion of property in section 8c(2)(xviii). Whereas completion clause is clearly mentioned in section 24b. This article is totally misleading. Refer indian gov site.

    http://www.incometaxindia.gov.in/pages/acts/income-tax-act.aspx

  • January 20, 2016 at 2:33 pm
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    @Aviator

    We have clearly mentioned that various CA and companies have their own interpretation in this regard. While some of the big corporate (IT Companies) agrees to the fact and allow principal payment under 80C, there are other who deny this.

    Even my office allow principal amount to be claimed under 80C for under construction property.

  • March 15, 2016 at 12:00 am
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    Can you please give the details of declared scheme of deduction of additional interest of 50000 per annum on louse loan until 35 lakh? What are the conditions for that? Is their any condition on minimum amount of Loan? How it will get process?

  • March 15, 2016 at 7:53 am
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    Akshay,

    1) It is applicable from next year only and not for the financial year 2016-2016.

    2) The condition is, the home should cost less than 50L and loan amount allowed is maximum 35L.

    3) There is no lower limit for the loan amount.

    About process, if you are planning to purchase a home after march 2016, you can claim this provided you meet the conditions as indicated in 1-3.

  • May 7, 2016 at 7:13 pm
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    If I have two houses, first home( value 20lac) is not under loan but second home(1cr) is taken by home loan. Can claim deduction under sec 24 treating my first home as self occupied and second home let out showing notional rent for that area in income tax and claim complete interest rebate instead of 2lac limit. Even if I am living in second home and rented first home.?

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