2016 is looking to be one of the best years for home
buyers. More tax benefits, rate cuts on loans, stagnant property prices,
and new launches in the 'affordable' segment with freebies and
attractive payment schemes. Many of you will be looking to take
advantage of these benefits and buy a house. While hunting for a house
at the right price, you'll be haggling with the bank to cut a loan deal
too. Even if you get a discount on both, your tax bill can burn a hole
unless you know the rules well. Here goes a list of six lesser known and
often-missed tax benefits on home loans:
You can claim tax benefit on interest paid even if you missed an EMI
Unlike the deduction on
property taxes or principal repayment of home loan, which are available
on 'paid' basis, the deduction on interest is available on accrual
basis. Meaning, even if you have missed a few EMIs during a financial
year, you would still be eligible to claim deduction on the interest
part of the EMI for the entire year. Section 24 clearly mentions the
words "paid or payable" in respect of interest payment on housing loan.
Hence, it can be claimed as a deduction so long as the interest
liability is there. However, retain the documents showing the deduction
so that you can substantiate if questioned by tax authorities. The
principal repayment deduction under Section 80C, however, is available
only on actual repayments.
Processing fee is tax deductible
Most taxpayers are unaware that charges
related to their loan qualify for tax deduction. As per law, these
charges are considered as interest and therefore deduction on the same
can be claimed. Under the Income Tax Act, Section 2(28a) defines the
term interest as 'interest payable in any manner in respect of any money
borrowed or debt incurred (including a deposit, claim or other similar
right or obligation). This includes any service fee or other charge in
respect of the loan amount. Moreover, there is a tribunal judgement
which held that processing fee is linked to services rendered by the
bank in relation to loan granted and is thus covered under service fee.
Therefore, it is eligible for deduction under Section 24 against income
from house property. Other charges also come under this category but
penal charges do not.
Principal repayment tax benefit is reversed if you sell before 5 years
You score negative tax points if you sell a house
within five years from the date of purchase, or, five years from the
date of taking the home loan. As per rules, any deduction claimed under
Section 80C in respect to principal repayment of housing loan, would get
reversed and added to your annual taxable income in the year in which
the property is sold and you will be taxed at current rates. Thankfully,
the loan amortisation tables are such that the repayment schedule is
interest heavy and the tax-reversal rule only apply to Section 80C.
Loans from relatives and friends is eligible for tax deduction
You can claim a deduction under Section 24 for
interest repayment on loans taken from anyone provided the purpose of
the loan is purchase or construction of a property. You can also claim
deduction for money borrowed from individuals for reconstruction and
repairs of property. It does not have to be from a bank. For tax
purposes, the loan is not relevant, the usage is. The taxpayer should be
able to satisfy the assessing officer how the loan has been utilised
for constructing or purchasing a house property and completion of
construction was within five years and other conditions are met.
Remember, the lender must also file an income-tax
return reporting the interest income and paying tax on it. "The interest
charged should be reasonable and a legal certificate of interest should
be provided by the lender along with name, address and PAN," says
Gupta. This rule, however, is only applicable for interest repayment.
You will lose all tax benefits for principal repayment if you do not
borrow from a scheduled bank or employer. The additional benefit of Rs
50,000 under Section 80EE is also not available.
You may not be eligible for tax break even if you are just a co-borrower
You cannot claim a tax break on a home loan even if
you may be the one who is paying the EMI. For one, if your parents own a
property for which you are paying the EMIs, you can't claim breaks
unless you co-own the property. You have to be both an owner and a
borrower to claim benefits. If either of the titles are missing you are
not eligible. Even if you own a property with your spouse, you can't
claim deductions if your name's not on the loan book as a co-borrower.
You can claim pre-construction period interest for up to 5 years
You know you can start claiming your know you can
start claiming your home loan benefits once the construction is complete
and you receive possession. So, what happens to the instalments you
made during the construction or before you got the keys to the house? As
per rules, you cannot claim principal repayment but interest paid
during the period can be accrued and claimed post- possession. The law
provides a deferred deduction on the interest payable during
pre-construction period. The deduction on such interest is available
equally over a period of 5 years starting from the year of possession.
201, Prestige Precinct, Near Nitin Casting, Almeida Road, Panchpakhadi
Thane West - 400601
Phone: 91-22-25985951-55
Email: prescon@prescon.in
