Decoding tax benefits on interest on Loan against Property

If you have taken a home loan to buy a house, your interest outgo can help you save on tax. Let’s find out how.

The quantum of tax benefits that can be claimed depend upon whether you live in the house property or it has been rented out. It is worthwhile to note that all these tax benefits can be available where the construction of the house property has been completed.

These are not available for a property which is under construction. However, interest that belongs to the pre-construction phase is allowed to be claimed based on certain conditions.

For Self Occupied House Property:  The maximum tax benefit for interest on a home loan is restricted to Rs. 2, 00,000 whether you live in the house yourself or whether it is lying vacant. The same cap applies if your parents, spouse or children live in the house, or if you leave the house vacant. This deduction is available under Section 24 of the Income Tax Act. Please note that the loan must have been taken for purchase or construction of a house property. If loan has been taken for repairs or reconstruction of a property your interest deduction shall be limited to Rs. 30,000. Also, the purchase or construction must be completed within 3 years from the end of the financial year in which the loan was taken. You need to show the interest payout for the financial year under the head ‘income from house property’ in your income tax return. This loss that arises due to interest shall be adjusted against income earned by you under other heads such as salary or income from other sources. Any unadjusted loss can be carried forward for eight assessment years in your return and set off against house property income in the subsequent years.

For Rental Property: If you have let out the house for which you have taken a loan, you are allowed to claim the entire interest against the rental income. You can also reduce property taxes paid by you. From the net value, which is rental income less property taxes, a standard deduction of 30% (of net value) is allowed to be claimed. Also, the entire interest payment is allowed to be adjusted from such net value. Therefore, rental income less property taxes less 30% standard deduction less interest on home loan shall be your income (or loss) under the head house property. Similar to loss on a self-occupied house property, this loss can be adjusted against other heads of income and carried forward to 8 years when not adjusted fully.

Pre-construction Interest Pre-construction interest is allowed in 5 equal installments, starting from the year in which the house is purchased or the construction is completed. Accumulate the interest outgo for the years before the financial year in which construction was completed, and claim it along with the interest for the current financial year. Do note that pre-construction interest is included within the overall limit of Rs. 2, 00,000 for a self-occupied house and only a fifth can be claimed each year.

How to claim Interest Deduction You can claim this deduction at the time of filing your return if you have not informed your employer about it in a timely manner. Here are the details and documents you will need to claim interest deduction in your return.

Ownership details of the property – The tax benefits of interest are only available to owner of a house property. You may be repaying the interest, but if you are not an owner you will not be able to claim interest deduction in your return. In case you are a co-owner in the property find out your share in the property. The amount of deduction you can claim is based on your share in the property. Both the joint owners can claim a maximum deduction of Rs. 2, 00,000 each for a self-occupied property.

Completion of construction or date of purchase of the property – The deduction for interest can be claimed starting the year in which the construction of the loan against property is completed. You can also claim pre-construction interest as mentioned above.

Borrower Details – For claiming interest deduction the owner must also be a borrower in the home loan documents.

A certificate from the bank which has your interest and principal details. This you can use to find out your outgo towards interest and principal. Municipal taxes paid during the year.

Municipal taxes are allowed to be deducted when these have been actually paid during the year.

Other Tax Benefits Besides interest, the portion of your EMI which goes towards principal repayment is allowed to be claimed under section 80C. This amount can be claimed within the overall limit of Rs 1, 50,000 under section 80C. If you have paid stamp duty and registration charges, those are also allowed to be claimed under section 80C

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