When you take a home loan, what are the tax benefits that you can avail of? Read on to find out more about taxation and home loans.

What tax benefits can one avail 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, 1961. These deductions are available to assessees, who have taken a loan to either buy or build a house, under Section 24(b).

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

1. If the following conditions are satisfied, interest on borrowed capital is deductible up to Rs 150,000.

• Capital is borrowed on or after April 1, 1999 for acquiring or constructing a property.
• The acquisition/construction should be completed within 3 years from the end of the financial year in which capital was borrowed.
• 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 principle amount outstanding under an earlier loan taken for such acquisition or construction.

2. If the conditions stated above are not satisfied, then the interest on borrowed capital is deductible up to Rs 30,000. However, the following conditions have to be fulfilled:

• Capital is borrowed before April 1, 1999 for purchase, construction, reconstruction repairs or renewal of a house property.
• Capital should be borrowed on or after April 1, 1999 for reconstruction, repairs or renewals of a house property.
• 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.
  
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(B) In addition to the above, principal repayment of the loan/capital borrowed is eligible for a deduction of up to Rs 100,000 under Section 80C from assessment year 2006-07.

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 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, 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 payments on his home loan, can he claim tax benefits on the interest payable, under Section 24 and deduction under Section 80C of the Income Tax Act?

Tax benefits under Section 24 and deduction under section 80C 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 the father and the loan has been sanctioned on the basis of the son's salary, can the son claim the tax rebate and deduction in respect of the interest payments?

According to the Income Tax Act, only 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 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 of whom are taxpayers with independent income sources, get tax deduction benefits, with respect to the same housing loan?

Yes, in this case, the husband and wife (being tax-payers with independent sources of income) can get tax deduction benefits with respect to the same housing loan.

In the above case, in what proportion will the tax benefits be shared?

To the extent of the amount of loan taken in their own respective names.

What are the tax implications if a person buys a house with a loan and sells it (a) within the same year, (b) after three years? Further, what is the impact on benefits related to interest and capital repayment?

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 tax liability arises on the same.

Let us take an example to better understand the same. For example, if you purchase a house for Rs 500,000 by taking a loan and you 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 had taken place after 3 years, then a long-term capital gains tax liability would have arisen.

The long-term capital gains will be exempt from tax if the profit amount (after factoring in the indexation benefits) is invested in capital gains tax saving bonds or 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 proved 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 and benefits, previously claimed, will be clubbed to the income and taxed accordingly.

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