Housing Finance and Tax Planning: CAIIB Retail banking (Module E), Unit 2
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So, here we are providing “Unit 2: Housing Finance and Tax Planning” of “Module E: Additional Reading Material On Home Loans” from “Optional Paper: Retail Banking”.
The Article is CAIIB Unit 2: Housing Finance and Tax Planning
Tax Benefits In Respect of Housing Finance
In respect of Loan taken for Purchase/Construction of a Residential Unit, the borrower can avail benefit of payment of interest as well as repayment of principal.
Home Loan Tax Benefits
- Tax deduction on payment of home loan interest – section 24
- Tax deduction on principal repayment of housing loan – section 80C
- Tax deduction for first time home buyer – section 80EE
Tax benefit under section 24(b)
Interest on housing loan can be claimed as a deduction from income from property, salary, business profession, capital gains, or any other source upto a maximum of Rs. 2,00,000 under section 24(b) of the Income tax Act, 1961 every year subject to fulfilment of the following conditions.
- Loan has been taken on or after 1st April 1999.
- Loan is for purchase or construction of a residential property or as re-finance (takeover) of the principal amount outstanding under a loan taken earlier for purchase or construction of a residential property. However, in case of loan for construction, the construction should get completed within 35 Years of raising the Loan. Deduction can be claimed only from the financial year when the purchase/construction is completed.
- The lender issues a certificate at the end of the financial year mentioning therein the interest and principal paid during the year in respect of that loan.
- Interest payment of home loan taken for a self-occupied property.
If the loan is availed for repair or renewal an amount of Rs. 30,000 is only allowed under Section 24(b)
Computation of income from Self occupied property
|Gross annual value||Nil|
|Less – Municipal taxes paid during the year||Nil|
|Net Annual Value (NAV)||Nil|
|Less- Deduction under section 24|
|Deduction under section 24(a) @ 30% of NAV
Deduction under section 24(b) on account of interest on borrowed capital
|Income from house property||XXXX|
Under Section 80C
Tax benefit on Home Loan Principal Repayment under section 80C
The maximum tax deduction allowed under section 80C is Rs. 1,50,000. The tax deduction on principal repayment is also a part of the various deductions allowed under section 80C which includes amount invested in PPF Account, Tax Saving Fixed Deposits, Life Insurance premium, National Savings Certificate, Senior Citizens Saving Scheme, etc.
Conditions for claiming deduction under section 80C: Certain conditions must be satisfied to claim deduction under section 80C for principal repayment of home loan:
- Only if the construction of property is complete and have received a completion certificate for the same.
- No deduction would be allowed under this section for repayment of principal for those years during which the property was under construction.
- Deduction is also available whether the property is self-occupied or let out.
- The benefit can also be claimed for more than 1 house property.
Reversal of tax benefits availed under section 80C
If a house property for which tax benefit was availed under section 8OC, is sold within a period of 5 years from the end of the financial year in which the property has been received in possession, then:
- Tax benefit under 80C will not be eligible for claim in that financial year.
- The total amount of tax deduction already claimed in respect of earlier years shall be deemed to be income of such year in which the property has been sold and will be liable to pay tax on that income.
Tax benefit under Section 8OEE: Deduction for First Time Home Buyers
Just like deduction under section 24, the deduction under section 80EE is also available on the interest paid on the home loan by taxpayer or assessee. But his deduction is only available to first time home buyers. The quantum of deduction is Rs. 50,000 for interest paid on the home loan This deduction is available over and above the deduction of section 24 and section 80C which are Rs. 2,00,000 and Rs. 1,50,000 respectively.
Conditions Necessary for Claiming Deduction under Section 80EE: To claim this special tax benefit, the taxpayer must satisfy the following conditions:
- The deduction can be availed on home loans sanctioned only between 1st April to 31st March in the financial year.
- The value of property for which the loan has been taken should be less than Rs. 50 lakh.
- The home loan amount should not exceed Rs. 35 lakhs.
- The tax benefit here can be claimed till the time repayment of loan continues
- Deduction is only applicable on home loan paid for first house property.
- The property in question can be either self-occupied or non-self-occupied.
- The amount of claim deducted under this section will not be eligible to claim the deduction u/s 24 again for the same amount of interest.
- As on the date of sanction of loan no other house is owned by you.
Eligibility for Claiming Section 80EE Deductions
- The deductions under this section can be claimed only by individual taxpayers on properties purchased either singly or jointly.
- Section 80EE is applicable on a per person basis instead of a per property basis. So, suppose you have purchased property jointly with your spouse and you both are paying the instalments of loan then you both can individually claim this deduction.
- It is not necessary to reside in the property for which you want to claim this deduction. So borrowers staying in a rented accommodation can also claim this deduction.
If the property is rented out, interest paid on Loan can be fully deducted from the Income derived from the property without the limit of Rs. 2,00,000 or Rs. 30,000, as the case may be.
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