home loan

Home Loan Tax Benefits

Only a few things can match the joy and happiness of buying a house. It is a nest of your own where you are happy being who you are. For most people, it is the biggest investment in their life. The Indian government has always encouraged its citizens for such investment. Making home loan tax deductible is an approach towards the purpose.  When taking out a home loan, you make yourself eligible for multiple housing loan tax benefits that save a great chunk of your tax outgo.

Schemes like Pradhan Mantri Jan Dhan Yojana are designed to address the issues of accessibility and affordability. Definitely a great job done on the Indian housing sector! In this article, we will shed some light on home loan tax benefits.

Deduction on Home Loan Interest

Home loans are granted for construction or purchase of a house. If taken for construction, the borrower is obliged to pay it back in 5 years from the end of the financial year, in which the loan was approved.

If a housing loan is paid through EMI, it has two parts:

  • Interest Repayment
  • Principal Repayment

The interest part through yearly EMI payment can be claimed deductible from your total annual income up to Rs 2 lakh (upper slab) under Section 24.

From 2018-19 onwards – it marks the year of assessment – the maximum deductible interest payment on self-occupied house property is Rs. 2 lakh. However, there is no upper limit to claim interest deductibility on the left-out property.

However, under the ‘House Property’ category, the claimable overall loss is limited to only Rs. 2 lakh. This deduction of interest on housing loan can be claimed from the year of the completion of the house construction.

Deduction on Interest Payment towards Home Loan During Pre-Construction Period

For example, you bought an under-construction property and are yet to move in. However, you are regular with your EMI payment. In such a case, you are considered eligible for interest deduction claim on your home loan only after the house construction is done or immediately after your buying a fully constructed property.

What does it mean? You won’t be able to get tax benefits on the interest payment during the period between loan borrowed and construction done? NO. Why? Let me explain it.

According to the Income Tax Act, you are allowed to claim deduction on such interest payment, which is called pre-construction interest. An even distribution of deduction in five instalments starting from the year of acquiring the property to completion of construction is allowed in addition to other deductions you are entitled to claim from your house property income. Remember the upper slab is Rs 2 lakh.

Say, you pay interest Rs. 10000/month on a home loan you have borrowed. Your house construction was done in 2019 after two years. So, you are eligible to claim pre-construction interest of Rs. 2.4 lakh (an approx. figure) only after completion of construction in five equal instalments starting from 2019. Maximum deductible income is Rs. 2 Lakh under Section 24(b). This interest includes both pre-construction interest and current year interest.

If you are eligible for home loan deduction under Section 80EEA, you are entitled to an additional deduction claim of Rs 1.5 lakh. In the next section, we will talk about Section 80EEA.

Deduction on Principal Payment

Under Section 80C, you are allowed to claim deduction on the principal part of EMI payment for the year. The upper limit on the deductible amount that you can claim is Rs. 1.5 lakh. But for deduction claim, you must not sell the house property within five years of owning it. Doing so will result in addition of earlier deduction claim to your income in the year of property sale.

Deduction for Registration Charges and Stamp Duty

Section 80C also allows a deduction for registration charges and stamp duty within the limit of Rs. 1.5 lakh. You are eligible to claim only in the year you incur these expenses.

Additional Deduction under Section 80EE

Under Section 80EE, home buyers are eligible for additional deductions with a maximum limit of up to Rs. 50, 000. To qualify for the deduction claim, the following conditions should be fulfilled:

  • The amount of loan borrowed should be Rs. 35 lakh or less and the value of the property must not be greater than Rs. 50 lakh
  • The loan must have been approved from 1st April, 2016 to 31st March, 2017.
  • The individual must be a first-time house owner on the date of loan sanctioned.
  • Section 80EE, which was reintroduced, remains valid for loans granted till 31st March, 2017 only.

Additional Payment Deductions under Section 80EEA

Budget 2019 introduced an additional payment deduction under Section 80EEA to promote the housing sector. Under this section, homebuyers are entitled to claim a maximum deduction of up to Rs. 1, 50, 000.

To qualify for this deduction claim, the following two conditions must be fulfilled:

  • The stamp value of the property must not be more than Rs. 45 lakh.
  • The loan must have been sanctioned within the period of 1 April, 2019 to 31 March 2022 (previously it was 31 March 2021).
  • The individual must be a first-time home buyer on the date of loan approval.
  • The individual is not allowed for deduction claim under Section 80EE if the person claims deduction under this section.

Deduction for a Joint Home Loan

If it is a joint home loan, each borrower is allowed to claim a deduction of up to Rs. 2 lakh for home loan interest each and up to Rs. 1.5 lakh each on principal repayment in their tax returns under Section 80C.

To be eligible for this home loan tax benefits, the co-borrowers should also co-own the property for which, the loan is taken. Hence, a joint loan taken with your family will help you claim a larger benefit from tax deduction.

How Does Demography Influence Home-Loan Market?

Young people now dominate India’s population landscape. People under 35 years of age constitute 66 per cent of India’s population. With the rapid surge in young population, the country experiences a steep rise in home loan demands. The young borrowers in the age group of 26-35 years and the middle-aged person in the age group of 36-45 years are driving the home loan market. These active home-loan takers account for 53 per cent of yearly originations.

The average ticket size of what these young audiences take out on their home purchase has continued to snowball over the last 5 years, with a CAGR of 6.2 per cent. Interestingly, this ticket size continues to inflate more for women than for men. The borrowers’ cumulative active home-loan base has registered continuous growth over the last three years, with a CAGR of 3.5 per cent. These young audiences are the driving force behind the changing home-loan market.

In the affordable group, the amount of home loan growth in the range of Rs 15-35 lakh in the last few years clearly indicates that the buyers are shifting towards higher ticket sizes. Rural housing is more in favour of higher ticket and mid-range sizes and this demand has continued snowballing over the last 5-7 years. Share of annual originations in the ticket size of the range of Rs 35-75 lakh has experienced a 4 per cent jump in the last 5 years. Share of annual originations in the ticket size of Rs 75 lakh has experienced a jump from 0.37 per cent to 0.87 per cent over the last 5 years.

Share of annual originations of the ticket size of Rs 15 lakh has dropped in the last 5 years, mainly due to dip in demand for small ticket size of Rs 2 lakh. Scarcity in disposable income has been a constraint for salaried class’ taking home loan for real estate purchase. The input cost in this sector has driven up the rates and it has left the salaried class with no options but to borrow home loans from the lending institutions. An interesting observation is the tenure of home loan repayment is oscillating between 11-30 years.

EMI is another deterrent factor for the salaried class in taking home loans. EMIs are less supportive an option since the financial institutions take a larger part of interest through EMIs and the principal part is less drawn from more than 50 per cent of the EMIs. Towards the end of EMI instalments, interest becomes small whereas principal becomes higher.

Even if pre-payment of home loan is allowed, the buyer ends up paying a large part of principal amount. Besides, the financial institutions levy heavy fees on loan pre-closure. If the buyer goes with higher tenure to pay off loans, it gets difficult for the person to buy second property.

What if the amount of principal and interest are pre-defined? Can EMIs have equal share throughout the tenure? These are some common questions asked by the potential investors in the context of home loan income tax benefits.

According to many great philanthropists in the world, real-estate investment is a password to become millionaires. Look around, see the number of millionaires/billionaires and you will realize it is so true. Many people wait for the right time to invest in real estate but if you are to rely on words of author and businessman Hary Eker, “buy real estate and wait”. Real-estate investment is directly related to a buyer’s future and a country’s prosperity as well.