The average age of person/s having own residential accommodation has come down substantially from about 42 years in the financial year 2001-02 to 31 years in the financial year 2006-07, as per the National Housing Bank estimates.

Do you know how has this become possible for a vast number of young Indians to own their dream homes? This was made possible because of lower interest rates and most importantly tax sops.

Why are tax sops so important?

Over the last few years, the major tax sop available to the employees was in the form of a standard deduction, which is now withdrawn. There are virtually no tax sops available to the employees, who are having significant taxable income and tax liability.

The investment opportunities for the purpose of tax planning are also limited with a cap up to Rs 1 lakh only. Hence, housing loans have become an attractive proposition to save taxes, apart from other equally important aspect like fulfilling the dream of owning a house.

What are the tax sops available through housing loans?

The first and the foremost tax sop is the interest amount that you pay on housing loans. The interest on housing loans in the initial years is the major component of the EMI you pay. The interest may exceed the rental income from house property, resulting in loss from house property.

In the case of self occupied residential houses, the entire interest is the loss from such house property. This loss can be set off against income from other heads such as salaries, business or profession.

The next important tax sop is the installment paid on housing loans. The installments are allowed as a deduction from the gross total income on par with other tax saving investments u/s 80C of the Income Tax Act.

What kind of housing loans are eligible for tax sops?

Housing loan can be taken for the purpose of acquiring or constructing a property. Housing loan taken for the purpose of repair, renewal or reconstruction of the house property is also eligible for tax sops.

What kind of house properties is considered for deduction of interest?

All kinds of house properties are considered for allowing the deduction of interest on loans. The gross annual value from house property is considered for the purpose of allowing deduction of interest on loans.

How is gross annual value from house property determined?

If the house property is let out, the fair rental value of such house property is considered as gross annual value.

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If a person occupies a house property for her/his own residential purposes, such residential property is considered as self occupied and there is no income chargeable as 'income from house property'.

If a person occupies more than one house property for her/his own residential purposes, only one house is considered as self occupied, according to her/ his own choice. The other house/s are deemed to be let out and the gross annual value is determined on the basis of the municipal valuation for such house property.

If a person occupies a house property for self occupation for part of the year and lets it out for another part of the year, she/he will not be eligible for the benefit of self occupation and the gross annual value will be determined as if the house property is let out.

If a person has a residential house, comprising two or more dwelling units, out of which one is self occupied and the others are let out, the gross annual value is determined on the basis of fair rental value for the dwelling units, which are let out. The gross annual value will be nil for the dwelling unit, which is self occupied.  

Net annual value

Net annual value is derived after deducting municipal taxes actually paid from the gross annual value of the house property, which is let out. In the case of self occupied property, there will be no deduction towards municipal taxes.

Interest on housing loan

Interest on housing loan is allowed as a deduction from the net annual value of the house property. The following major points in connection with the allowance of interest on housing loan need to be considered:

~ Interest is allowable up to a maximum of Rs 1,50,000, provided the loan is taken on or after 1st April 1999 for the purpose of construction or acquisition of house property.

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~ Interest is allowable up to a maximum of Rs 30,000 only, if the loan is taken before 1st April 1999 or if the loan is taken for the purpose of reconstruction, repairs or renewals of a house property is taken before or after the cut off date, ie, 1st April 1999.

~ Interest is allowed as an expenditure on accrual basis, ie, if such interest becomes due but is not paid during the year.

~ Interest is allowed as expenditure even if the property is self occupied and there is no gross annual value.

~ Interest is allowed as expenditure only if the house property is acquired or constructed within 3 years from the end of the financial year, in which the loan was taken.

~ The person extending the loan shall issue a certificate to the borrower about interest payable during the financial year.

~ Interest payable during pre-construction period will be allowed in five equal annual installments, commencing from the financial year, in which the house is acquired or constructed.

~ Interest on unpaid interest is not allowed as a deduction.

~ Interest is allowed even if there is charge on the house property.

Standard deduction

In the case of properties which are let out, there will be a standard deduction @ 30 per cent of net annual value, irrespective of any expenditure incurred towards the house property.  In the case of self occupied property, there will be no standard deduction.

Loss from house property

There may be a loss from house property, after allowing the deductions towards municipal taxes, standard deduction and interest on housing loan.

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This loss from house property can be set off against income from other heads of income, such as income from salaries, business or profession, capital gains and other sources.

If the loss from house property cannot be fully set off against income from other heads of income, it can be carried forward and set off against income from house property in the subsequent years. This can be carried forward up to a maximum of 8 assessment years.

Thus, if there is a loss of say, Rs 1 lakh from house property, after setting off against income from other heads, during the financial year 2006-07, it can be set off against income from house property up to the financial year 2014-15.

Installments paid on housing loans

Installments paid on housing loans are allowable as a deduction u/s 80C on par with other deductions allowed u/s 80C. Thus the maximum limit of deduction u/s 80C along with other deductions u/s 80C, 80CCC and 80CCD is Rs 1 lakh.

The installments may be towards the amount due under any self financing or other scheme of any development authority, housing board. The housing loan may be taken from the housing finance institutions, banks or even the employer, where such employer is a public company/public sector company/university/co-operative society.

The installments actually paid during the financial year only will be allowed as deduction unlike the interest on housing loans, which is allowed on due basis.

Some important hints for tax planning

~ The house property shall be registered in the name of the person, who intends to claim deduction towards interest and installment.

~ In the case of working couples having substantial taxable incomes, it may be worthwhile to register the housing property in the joint names and take separate housing loans to claim deduction of interest and installments.

~ If possible, the EMIs may be planned in such a way that the payments towards principal part of the loan do not exceed the limits available u/s 80C.