If you want to learn how to save tax on home loan interest, this guide is for you. It also talks about how to report home ownership in your income tax return.
1. Basics of House Property
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. An owner for the purpose of income tax is its legal owner, someone who can exercise the rights of the owner in his own right and not on someone else’s behalf.
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.
Self-Occupied House Property
A self-occupied house property is used for one’s own residential purposes. This may be occupied by the taxpayer’s family – parents and/or spouse and children. A vacant house property is considered as self-occupied for the purpose of Income Tax.
If more than one self-occupied house property is owned by the taxpayer, only one is considered and treated as a self-occupied property and the remaining are assumed to be let out. The choice of which property to choose as self-occupied is up to the taxpayer.
Let Out House Property
A house property which is rented for the whole or a part of the year is considered a let out house property for income tax purposes
When you inherit property from your father, you will be taxed like if it were your own property. When you own more than one house property, only one house is treated as self-occupied house property according to the I-T Department while others are assumed and taxed as if they are on rent.
2. 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 the home loan: Deduction is allowed for Interest on the 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.
Note: When a property is let out, its gross annual value is the rental value of the property. The rental value must be higher than or equal to the reasonable rent of the property determined by the municipality.
3. Computation of Total Income and Income From House Property
Rahul has a salary income of Rs 10 lakhs for AY 2017-18 & 2018-19 and Interest income from FD of Rs 4 lakhs. He owns 3 house properties :
Property A – Self-occupied for which he pays a housing loan interest of Rs 2.8 lakhs
Property B – Let out for residential purposes yielding a net income of Rs 60,000, after all, deductions
Property C – Let out for commercial purposes, the annual value being Rs 5 lakhs and interest on loan repayment being Rs 6.5 lakhs
He has invested in PPF to the extent of Rs 1.5 lakhs and also in NPS upto Rs 50,000
Let’s find out his tax liability for the AYs 2017-18 and 2018-19.
Computation of Total Income and Tax Liability
|Particulars||AY 2017-18||AY 2018-19|
|Income from other sources (Interest income)||4,00,000||4,00,000|
|Income from house property (*)||(4,40,000)||(2,00,000)|
|Gross Total Income||9,60,000||12,00,000|
|Tax on the above||77,000||1,12,500|
|Additional tax outgo excluding cess in AY 2018-19 on account of the amendment||35,500|
(*)Workings for Income from House Property
|Particulars||AY 2017-18||AY 2018-19|
|(-) Interest on housing loan restricted to||2,00,000||2,00,000|
|Loss from House Property(A)||(2,00,000)||(2,00,000)|
|Net income from House Property after all deductions (B)||60,000||60,000|
|Less : Standard Deduction||1,50,000||1,50,000|
|Less : Interest on loan||6,50,000||6,50,000|
|Loss from House Property (C)||(3,00,000)||(3,00,000)|
|Total income from house property (A+B+C)||(4,40,000)||Restricted to (2,00,000).
Balance loss of Rs 2.4 lakhs can be carried forward for the next 8 AYs
Impact of Amendment as per Budget 2017
Till FY 2016-17, loss under the head house property could be set off against other heads of income without any limit. However, form FY 2017-18, such set off of losses has been restricted to Rs 2 lakhs.
This amendment would not really affect taxpayers having a self-occupied house property. This move will have an impact on taxpayers who have let-out/ rented their properties. Though there is no bar on the amount of home loan interest that can be claimed as a deduction under Section 24 for a rented house property, the losses which could arise on account of such interest repayment can be set off only to the extent of Rs 2 lakhs.
4. Tax Deduction on Home Loans
A. Tax Deduction on Home Loan Interest: Section 24
Homeowners can claim a 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.
See all the conditions to claim the Rs.2 lakhs rebate-
- The home loan must be for purchase and construction of a new property;
- The loan must be taken on or after 1 April 1999;
- The purchase or construction must be completed within 3 years from the end of the financial year in which the loan was taken
When is the deduction limited to Rs.30,000?
If the construction of the property is not completed within 3 years the deduction on home loan interest shall be limited to Rs 30,000. The period of 3 years is calculated from the end of the financial year in which loan was taken. So if the loan was taken on 30th April 2015. The construction of the property should be completed by 31st March 2019. (This period has been extended to 5 years in Budget 2016 which is applicable from the financial year 2016-17)
Also, where the loan has been taken for reconstruction, repairs or renewal, only Rs.30,000 shall be allowed as deduction.
Note: The deduction can only be claimed, starting in the financial year in which the construction of the property is completed.
How do I claim a 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 a 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.
B. 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 from FY 2014-15 onwards (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.
Conditions to claim this deduction-
- The home loan must be for purchase or construction of a new house property.
- The property must not be sold in five years from the time you took possession. Doing so will add back the deduction to your income again in the year you sell.
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.
C. Tax Deduction for First-Time Homeowners: Section 80EE
Section 80EE recently added to the Income Tax Act, provides a 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 to ITR-2 form here.
5. Claiming Deduction on Home Loan
- 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.
6. Tax Benefits on Home Loans for Joint Owners
The joint owners, who are also co-borrowers of a self-occupied house property can claim – a deduction on interest on the home loan up to Rs 2,00,000 each. And deduction on principal repayments, including a 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.
Therefore, to claim the tax benefits on the property:
- You must be a co-owner in the property
- You must be a co-borrower for the loan
Since, each co-owner can claim a deduction of maximum Rs 1,50,000 towards repayment of principal under section 80C. This is within the overall limit of Rs 1,50,000 of Section 80C. Therefore, as a family, you will be able to take a larger tax benefit against the interest paid on the home loan when the property is jointly owned and your interest outgo is more than Rs 2,00,000 per year.
It’s important to note that the tax benefit of both the deduction on home loan interest and principal repayment under section 80C can only be claimed once the construction of the property is complete.These benefits are not available for an under construction property.
There may be a situation where you are paying the entire loan installment and the co-borrower is not contributing any payments. In such a case, you may claim the entire interest as a deduction on your Income Tax Return.
7. HRA and Deduction on Home Loan
Yes, you can enjoy both tax benefits if your employer provides you with an 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 accommodation and you bought a house in your hometown
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 the 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
8. Case Study
9. Frequently Asked Questions
- What is your ‘income from house property’ when you/your family live(s) in it?
If you are using your property for residence throughout the year and it’s not let out or used for any other purpose, it is considered a self-occupied house property. The gross annual value of this property is zero. There is no income from your house property.
Note: 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 your income from other heads.
- I own a house of two floors and run my business out of the Ground Floor. I live on the 1st Floor. How much will I pay in taxes?
The Ground Floor will not be taxed under “income from house property” head. It shall be taxed under Business & Profession head.The first floor will be treated as a self-occupied house property. Income from house property will be zero in this case.
- A house has been self-occupied for six months and rented out for six months. What is its income?
Calculate the gross annual value of the property by finding out its reasonable rent and actual rent collected.
If Actual Rent is lower than Reasonable Rent, only because the house was vacant and not for any other reason, take actual rent collected as Gross Annual Value.
If Actual Rent is lower than Reasonable Rent because of other factors (say the tenant and the landlord are related), then take reasonable rent as GAV.
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