What tax benefits can one get on a home loan?

Tax benefits can be claimed on both the principal and interest components of the home loan as per the Income Tax Act. These deductions are available to assesses, who have taken a loan to either buy or build a house.

(A) Interest on borrowed capital is deductible as follows:

If the following conditions are satisfied, interest on borrowed capital is deductible up to Rs 150,000,
1. Capital is borrowed on or after April 1, 1999 for acquiring or constructing a property.
2. The acquisition/construction should be completed within 3 years from the end of the financial year in which capital was borrowed.
3. The person extending the loan, certifies that such interest is payable in respect of the amount advanced for acquisition or construction of the house or as refinance of the principal amount outstanding under an earlier loan taken for such acquisition or construction.

If the conditions stated above are not satisfied, then the interest on borrowed capital is deductible up to Rs 30,000.

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However the following conditions have to be fulfilled,
1. Capital is borrowed before April 1, 1999 for purchase, construction, reconstruction repairs or renewal of a house property.
2. Capital should be borrowed on or after April 1, 1999 for reconstruction, repairs or renewals of a house property.
3. If the capital is borrowed on or after April 1, 1999, but construction is not completed within 3 years from the end of the year in which capital is borrowed.

(B) In addition to the above, the principal repayment of the loan/capital borrowed is eligible for rebate under Section 88 up to Rs 20,000.

A person avails deductions allowed under Section 24 in respect of his self-occupied house property and he takes an additional loan for extension/addition to the same house; can he claim benefits from the interest deduction on the additional loan taken?

The maximum deduction permissible in a financial year for the original loan (if any) plus for any additional loans taken is Rs 150,000.

Hence, if the person's deductions on the existing loan are less than Rs 150,000, then he can claim further benefits from the additional loan taken, subject to the upper limit of Rs 150,000 for a financial year.

If a person fails to make EMI (equated monthly instalments) payments on his home loan; can he claim tax benefits on the interest payable under Section 24 and rebate under Section 88 of the Income Tax Act?

Tax benefits under Section 24 and rebate under Section 88 of the Income Tax Act can be claimed only when the payment is made. If a person fails to make EMI payments, he cannot claim tax benefits for the same.

If a home loan is taken by a father and the loan has been sanctioned on the basis of his son's salary, can the son claim tax rebate & deduction in respect of the interest payments?

According to the Income Tax Act, the person who has taken the loan can claim tax rebates. Hence in this case only the father will be eligible for the tax rebate.

If a fresh loan is taken to repay an existing loan, which was taken for constructing a house. Can the interest on the fresh loan be claimed as a deduction?

Tax deductions can be claimed on home loan interest payments subject to an upper limit of Rs 150,000 for a financial year. Interest on the fresh loan can be claimed as a deduction subject to the stated upper limit.

Does interest on a loan taken for repairs, renewals or reconstruction also qualify for the deduction of Rs 150,000?

Yes, the interest on a loan taken for repairs, renewals or reconstruction also qualifies for the deduction of Rs 150,000.

Can a husband and wife (both are tax payers with independent income sources) get tax deduction benefit in respect of the same housing loan?

Yes, both the husband and wife (being tax payers with independent income sources) can get tax deduction benefit in respect of the same loan.

If a person were to buy a house on a loan, and sell it within (a) the same year (b) after 3 years, what will be the tax implications of the same?

If a person buys a house and sells it within the same year/after 3 years, and if any profit is made, then a capital gains liability arises on the same.

Let us take an example to better understand the same. Suppose you purchase a house for Rs 500,000 by taking a loan and sell it in the same year for Rs 700,000; then you make a profit of Rs 200,000.

On this profit, you will be liable to pay short-term capital gains tax since the sale took place in the same year. But if the sale takes place after 3 years, then a long-term capital gains liability will arise.

The long-term capital gains liability can be avoided by investing the profit amount (after factoring in the indexation benefits) in capital gains bonds or by investing in a house property as specified under Section 54.

Under what circumstances can the tax benefit for taking a home loan towards purchase of a property be denied?

If it is proven that the home loan is simply an arrangement between the loan-seeker and the builder or with a third party for the purpose of claiming tax benefits, then tax benefits will not be allowed. Benefits previously claimed will be clubbed with the income and taxed accordingly.

This article forms a part of the latest issue of Money Simplified - The Definitive Guide to Tax Panning. Click here to download, for FREE, the complete guide.