Tax treatment of Home Loans

    The Income Tax Act, 1961 provides tax benefits for assessees that have home  loans. The home loan which has to be repaid to the bank in monthly  installments. The installment consists of two components i.e. - interest and  principal repayment. The bank gives a detailed worksheet of the loan  calculation and of the bifurcation of the EMIs paid by the borrowers. These  monthly repayments are qualified for deductions from income tax.

    You can ask for Amortization Schedule from your bank which consist  the entire schedule of loan with detailed break-up month wise for Interest  as well as Principal repayment


Please find the tax treatment for EMIs paid by the borrower:

    Deduction under Section 80C of the Income Tax Act: The portion of the EMI  paid towards repayment of principal amount of the loan can be deducted from  income. The borrower can get a tax deduction for a maximum amount of Rs  1,00,000 each year under this section irrespective of his tax bracket. The  Act requires the home loan to be towards a property for self occupation.

    However, if the assessee's city of employment is different from the city  where he has purchased a home, he is still eligible for this deduction.

    So if you work in Delhi but has purchased a home your hometown, you can  still claim a deduction under this section even if he is not actually  staying in this home.

Deduction under Section 24(b) of the Income Tax Act

    The interest paid towards home loan is treated as an 'expense' under 'Income  from house property' and is deductible under Section 24(b) from the total  income of the assessee.

The maximum deduction permitted under this section is Rs 1,50,000 per annum.


In case of partial disbursement of loan

    In cases where some part of the loan is disbursed by the bank during  construction stage of the property, the tax treatment is slightly different.  This portion of the interest paid prior to completion of construction of
property cannot be claimed as a deduction in the year in which it is paid.


    However, upon completion of construction, the assessee can claim deduction  for this interest under Section 24(b) in 5 equal installments, i.e., 1/5th  for each of the five years after the end of construction period. Note that  the upper limit on deduction each year remains Rs 1,50,000.

    Assume you purchased a home in FY06.The property was still under  construction and was completed only in FY09. Some amount of loan was  disbursed by the bank in FY05-06 and you made interest payments of  Rs1,00,000 between FY06 and FY08. You can claim deduction of Rs 20,000 for 5  years starting from FY09.


Disbursement of loan

As we all know that Builder's generally offer 2 types of plan

Construction Linked

Down Payment

    If you have opted for down payment plan and received the entire loan money  in FY06, and EMI starts immediately, you would lose on the principal  repayment deduction under Section 80C for the 3 years until construction of  the property ends. This is because deduction under Section 80C can be  availed only after getting possession of the property.


In case of more than one home loan


    If you work in Delhi and has a purchased a home in your hometown for which  you have taken home loan. Will he still get benefit under the Act for this  second home your hometown?

    The answer is 'Yes'. Benefits under Section 80C and Section 24(b) can be  taken for more than one home if all these homes satisfy the requirements of  the Act. The home in delhi satisfies the condition of self occupancy while  the home in hometown comes within the exception of the self occupancy rule
that the city of work is different. Irrespective of the number of homes the  maximum limit of Rs 1,00,000 for Section 80C and Rs 1,50,000 for Section  24(b) still apply. Note that it does not matter if you gives one home on  rent. You will still be able to get the tax break.



In case of joint home loan

    What is the tax impact if you have taken the home loan jointly with your  wife? In this case both you and your wife can claim tax deduction on their  return if the home too is jointly owned by them. Tax benefit can be availed  in the same proportion as the burden of EMI borne by each. If you pay 80 per  cent of the EMI and your wife contributes towards the remaining 20 percent,  the tax deduction will be available in the same proportion. So if principal  repaid during a year is Rs 100,000 then you can claim Rs 80,000 under  section 80C and even your wife can claim Rs 20,000 under the section.

    If your wife does not co-own the home, then she will not get any tax  deductions for EMIs paid on such loan.


SOURCE : ASSETTREAT