Who is this guide for?
If you are thinking about buying a house or want to understand the tax implications of a home purchase, this page is a solid introduction to home buying and taxes.
Section I: Tax deductions on home loans
Get tax relief on your home loan EMI payments. This section has information related to tax deductions on:
- home loan interest
- pre-construction interest
- principal repayment
- home loan interest for first time home owners Section 80EE
- how to claim these deductions
Section II: Income from House Property
Know what your house property income is when:
- you are renting your house
- you and your family are living in the house
- your house is vacant
Section III: Basics of house property taxes
Have all your basic queries about taxes answered here
Tax deductions on home loans
1. Tax Deduction on Home Loan Interest: Section 24
Homeowners can claim deduction of up to Rs.2 lakhs (Rs. 1,50,000 if you are filing returns for FY 2013-14) on their home loan interest if the owner or his family reside in the house property. The same treatment applies when the house is vacant. If you have rented out the property, the entire interest on the home loan is allowed as a deduction.
Your deduction on interest is limited to Rs.30,000 if you fail to meet any of the conditions given below for the Rs.2 lakh rebate.
How do I claim tax deduction on a loan taken before the construction of the property is complete?
Deduction on home loan interest cannot be claimed when the house is under construction. It can be claimed only after the construction is finished. The period from borrowing money until construction of the house is completed is called pre-construction period.
Interest paid during this time can be claimed as tax deduction in five equal installments starting from the year in which the construction of the property is completed.
Note that a house doesn’t have to necessarily be occupied by the taxpayer for it to be considered a self-occupied house. Members of the family – spouse, parents and children – may also be living there.
If you own more than one house property, the I-T Department only counts one property as a self-occupied house. It treats all other houses as rented properties even if they are not rented at all. Rental income calculation is based on what rent a similar property in the area would earn.
Click here to know how he can claim deduction for interest on home loan. →
2. Tax Deduction on Principal Repayment:
The deduction to claim principal repayment is available for up to Rs. 1,50,000 within the overall limit of Section 80C in FY 2014-15 (Rs. 1,00,000 if you are filing returns for last financial year). Check the principal repayment amount with your lender or look at your loan installment details.
Stamp duty and registration charges
Stamp duty and registration charges and other expenses related directly to the transfer are also allowed as a deduction under Section 80C, subject to a maximum deduction amount of Rs.1,50,000. Claim these expenses in the same year you make the payment on them.
3. Tax Deduction for First-Time Homeowners: Section 80EE
Section 80EE, recently added to the Income Tax Act, provides first-time homeowners tax benefit of up to Rs.1,00,000.
Do you own more than one house?
If you own more than one house, you need to file the ITR-2 form. Read our guide about it here.
How your taxes changed from last year to now:
|Deductions||For FY ending
March 31, 2014
|For FY ending
March 31, 2015
|Deduction on home loan interest under Section 24||Rs. 1,50,000||Rs. 2,00,000|
|Deduction on principal repayment within the overall limit of Section 80C||Rs. 1,00,000||Rs. 1,50,000|
How to claim tax deductions on home loans?
- The amount of deduction you can claim depends on the ownership share you have on the property.
- The home loan must also be in your name. A co-borrower can claim these deductions too.
- The home loan deduction can only be claimed from the financial year in which the construction is completed.
- Submit your home loan interest certificate to your employer for him to adjust tax deductions at source accordingly. This document contains information on your ownership share, borrower details and EMI payments split into interest and principal.
- Otherwise you may have to calculate the taxes on your own and claim the refund, if any, at the time of tax filing. It’s also possible that you may have to deposit the dues on your own if there is a tax payable.
If you are self-employed or a freelancer, you don’t have to submit these documents anywhere, not even to the I-T Department. You’ll need them to calculate your advance tax liability for every quarter. You must keep them safely to answer queries that may arise from the I-T Department and for your own records.
Tax benefits on home loan for joint owners
The joint owners, who are also co-borrowers of a self occupied house property can claim – deduction on interest on home loan up to Rs 2,00,000 each. And deduction on principal repayments, including deduction for stamp duty and registration charges under section 80C within the overall limit of Rs 1,50,000 for each of the joint owners. These deductions are allowed to be claimed in the same ratio as that of the ownership share in the property.
You may have taken the loan jointly, but unless you are an owner in the property – you are not entitled to the tax benefits. There have been situations where the property is owned by a parent and the parent and child together take up a loan which is paid off only by the child. In such a case the child, who is not a co-owner is devoid of the tax benefits on the home loan.
Can I claim both HRA and deduction on home loan?
Yes, you can enjoy both tax benefits if your employer provides you with a HRA component as part of your salary and you are repaying your home loan.
You work in a city; you are living in a rented accomodation and your bought a house in your home town
Arjun works in Gurgaon, but his wife and children live in Sonepat. He recently bought a house in Sonepat on a loan while he continues to live on rent.
Arjun can claim:
- HRA for rent he pays for the house in Gurgaon,
- and deduction on interest up to Rs 2,00,000 on the home loan
You live in a rented accommodation since your house is too small for your needs
Raghav lives in a rented house in Noida since his son’s school and his wife’s office are in Noida, his own house on the outskirts of Delhi is smaller and is lying vacant. He is paying interest on loan on his own house.
Raghav can claim:
- HRA for rent he pays for the house in Noida,
- and deduction on interest up to Rs 2,00,000 on the home loan
You live in a rented house; your own house is also let out
Neha recently bought a flat in Indore, though she lives and works in Bangalore. She has no plans of returning to Indore in the next five years so she gives that flat on rent. She lives on rent in Bangalore.
Neha can claim:
- HRA rent she pays for house in Bangalore
- Entire interest on the home loan fully exempt from tax
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Income from House Property
Determine what your income from house property is.
The owner of a house property is taxed under the head ‘Income from House Property’ in his income tax return. Income from a property which is used for carrying on business or profession is not taxed under this head.
Steps to calculate income from house property
- Gross Annual Value of the property
The gross annual value of a self-occupied house is zero. It is the rent collected for a house on rent.
- Less: Property Tax
Property tax, when paid, is allowed as a deduction.
- Net Annual Value
Net Annual Value = Gross Annual Value – Property Tax
- Less: 30% standard deduction on NAV
A standard 30% deduction on NAV is allowed as a deduction under Section 24 of the Income Tax Act. No other expenses such as painting and repairs can be claimed as tax relief beyond the 30% cap under this section.
- Less: Interest on home loan
Deduction is allowed for Interest on home loan.
- Income from house property
The resulting value is your income from house property. This is taxed at the slab rate applicable to you.
- Loss from house property
Since the gross annual value of a self-occupied house is zero, claiming the deduction on home loan interest will result in a loss from house property. This loss can be adjusted against income from other heads.
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Basics of house property taxes
A house property could be your home, an office, a shop, a building or some land attached to the building say a parking lot. The Income Tax Act does not differentiate between a commercial and a residential property. All types of properties are taxed under the head ‘income from house property’ in the income tax return.
When a property is used for the purpose of business or profession or for carrying out freelancing work – it is taxed under the ‘income from business and profession’ head. Expenses on its repair and maintenance are allowed as business expenditure.