Tax Benefit on Home Loan

Last Updated 19th Jul 2019

Income Tax Slab Update : Budget 2019-20

  • No Income tax for individuals with Annual Taxable Income of upto Rs. 5 lakh. No change in Income Tax Slabs.
  • Surcharge increased by 3% for individuals with Income of Rs. 2-5 crores and by 7% for income more than Rs. 5 crores.
  • Aadhaar card can now be used interchangeably for PAN card. Thus, you no longer need PAN to file income tax returns.
  • Additional deduction of Rs. 1.5 lakhs for interest on home loan availed for purchase of Affordable houses of up to Rs. 40 lakh till March 2020.
  • Income tax deduction of Rs. 1.5 lakhs for interest on loan taken to buy an electric vehicle.
  • The annual turnover limit for corporate tax of 25% increased to Rs. 400 crores.
  • TDS of 2% on cash withdrawal of more than Rs. 1 crore in a year from a bank account to discourage business payments in cash.
  • Excise Duty on fuel hiked by Re. 1.
Tax BenefitsOn Principal Repaid On Interest Paid
First Home – Self Occupied Actual principal repaid subject to a maximum of Rs. 1,50,000 (Rs. 2 lakh for senior citizens) can be claimed as investment eligible for tax deduction under section 80C.
  • Actual home loan interest paid subject to a maximum of Rs. 2 lakh (Rs. 3 lakh for senior citizens) if house construction completed within 5 years from the end of the financial year in which loan is taken
  • If construction of house not completed within five years then Rs. 30,000 is tax exempt
  • Additional deduction of Rs. 1.5 lakhs for interest on home loan availed for purchase of Affordable houses of up to Rs. 40 lakh till March 2020.
First Home – Rented/ Vacant (deemed to be let out property)Upto Rs. 1,50,000 (Rs. 2 lakh for senior citizens) eligible for tax deduction under Section 80 C. The deduction is available only if the property owner is staying in a different city for work.
  • Exemption on interest is capped at lower of two, a) Rs. 2,00,000 or b) actual interest paid for all properties owned by a taxpayer.
Second Home or Additional PropertyNone
  • Exemption on interest is capped at lower of two, a) Rs. 2,00,000 or b) actual interest paid for all properties owned by a taxpayer
Under Construction Property None
  • The interest paid can be claimed in equal parts in five financial years post completion or handing over of property within the overall annual limit of Rs. 2 lakh.

For first residential property which is self-occupied, rented or vacant

How to avail home loan tax deduction

  • Principal repayment of up to Rs. 1.5 lakh (Rs. 2 lakh for senior citizens) can be clubbed under the overall limit for tax saving instruments eligible under Section 80C to claim tax benefit of upto Rs. 50,985 per annum
  • Deduction available for purchase or construction of first residential property which is self-occupied or is rented as the taxpayer has to live in a different city due to his work
  • Any amount paid towards partial or full prepayment of home loan is also eligible for tax benefit

For first self-occupied home

How to avail home loan tax exemption

  • Annual interest component of up to Rs. 2 lakh (Rs. 3 lakh for senior citizens) can be claimed as deduction against income under section 24
  • Tax liability can be reduced by upto Rs. 67,980 depending upon your tax slab
  • Additional deduction of Rs. 1.5 lakhs for interest on home loan availed for purchase of Affordable houses of up to Rs. 40 lakh till March 2020.
  • Available for purchase/ construction/ repair/ renewal/ reconstruction of a residential house property
  • Benefit available only for self-occupied property
  • Deduction is available on an accrual basis and not on a payment basis. Hence, deduction under Section 24 can be claimed on a yearly basis even if no payment has been made during the year but interest has accrued

For under construction property before possession

According to Section 24 of Income Tax Act, you can claim deduction against the interest amount that you have paid on your residential property during the pre-construction period.

  • Similar Deduction not available on principal repayment under Section 80C, for payments done during pre-construction period
  • Total interest paid during the pre-construction period can be claimed as tax deductible in five equal installments during five successive years from the year in which construction is completed and property is handed over to you.
  • Total allowable deduction stands capped at Rs. 2 lakh per year for self-occupied house.
  • Starting from current AY 2018-19 and as applicable for FY18-19(AY19-20), a limit of Rs 2 lakh has been placed on amount of total interest that can be claimed against income from let out or deemed to be let out property. Prior to this, there was no limit on interest that can be claimed as tax deductible in case of let out property and deemed to be let out property.
  • Tax deduction during construction period is not allowed for loan taken for repair or renewal of a residential property.

For rented or vacant property

Tax treatment on vacant property

  • Vacant property - As per Income Tax rule (Section 24), you will be required to account for deemed rent on the property as taxable income. Deemed rent is notional rent based on market rental values in the vicinity. Interest paid on loan taken to buy the property can be set off from the taxable income. In FY16-17 (AY 17-18), 100% of the interest is eligible for deduction on such properties. Starting from current FY17-18 (AY18-19) and as applicable for FY18-19(AY19-20), the interest benefit cannot exceed Rs. 200,000 per individual.
  • Property is not self-occupied for reason of employment, business or profession in different place or other city - As per Income Tax Rule (Section 24) tax deduction allowed is capped at Rs. 2 Lakh.
  • Property is part self-occupied and part is rented out - The interest must be split in proportion of the size of the two parts and tax benefit shall be split proportionately.

How to avail tax exemption

  • In case you own more than 1 property, one of which is self-occupied and others are rented out or lying vacant, till Assessment Year 2016-17, entire interest paid on such property can be set it off from rent received or deemed rent on such properties
  • In case the interest on home loan together with other deductible expenses (such as repairs, house tax, standard deduction of 30% on rented property etc) is higher than rental income/ deemed rental income, the loss can be adjusted against other income heads including salary income, business income, interest income; thus reducing the overall tax liability.
  • In case there is unabsorbed loss even after these adjustments, same can be carried forward for up to 8 years to be adjusted against taxable income in future years.
  • Starting from current FY2017-18 (AY 2018-19) and as applicable for FY18-19(AY19-20) - the maximum set off for interest paid on all properties, including self-occupied, rented and vacant properties has been capped at Rs. 200,000 per taxpayer, irrespective of the number of properties owned by the individual.

Joint home loan tax benefit: for co-applicant, co-borrower and joint owner

If the home loan that you have taken is in joint names then you can save more tax as compared to when you have taken home loan individually.

  • Each applicant and the co-applicants (any number) can avail tax benefit individually for a property in which they are joint owners
  • Each applicant and co-applicant can separately claim a maximum tax deduction of Rs. 1.50 lakh per annum for principal repayment under Section 80C and Rs. 2 lakh per annum for interest payment, under Section 24. However, the total tax benefit by all joint owners cannot exceed the total principal repayment and interest payment during the year.

Budget announcements on Home Loan Tax Benefits: FY2017-18 (AY2018-19) and FY2018-19(AY2019-20)

In the Union Budget 2018, there are no changes announced in provisions of tax benefit on home loan and capital gains on sale of housing property. In the previous union budget 2017, three significant changes with respect to income tax benefit on home loan and capital gains on sale of house property were introduced. To recap, these changes that were introduced in FY2017-18 (AY2018-19) and continue to be applicable in FY2018-19 (AY2019-20) are:

  • Change in long term capital gains definition - Upto 31st Mar 2017, any property sold within 3 years of purchase used to attract short term capital gains tax at marginal tax rate (30%). Starting FY 2017-18, a house property sale will qualify under long term capital gains if it is held for a minimum period of 2 years instead of 3 years and hence, be eligible for concessional tax rate of 20% with indexation benefit or 10% without indexation benefit. Further, the long term capital gains so accrued shall continue to be eligible for tax exemption by way of investment under capital gains bonds under section 54E. For more, refer to
  • Maximum interest exemption for tax benefit on home loan capped at Rs 2 lakh including that on rented property - Earlier, interest paid on capital borrowed to purchase a house or any other property for investment purpose (property that was not self occupied but was let out or lying vacant) was eligible to be set off from rental income without any limit. Further, loss from house property as a result of interest expense is more than the rental income was eligible to be set off from income under any head such as salary, business or interest. From FY 2017-18 and AY 2018-19, the maximum allowable deduction for interest on house property has been capped at Rs. 200,000 (Rs. 2 lakh only). This limit of Rs. 2 lakh is applicable to each taxpayer and is the maximum deduction available for interest paid on all properties owned by the taxpayer. However, this provision is not applicable for entities that are in the business of owning real estate.
    For more details, refer to the latter part of this page under the heading "Deduction of interest paid on home loan taken to purchase a property that is either rented out or not self-occupied ."
  • TDS on rent paid by individuals – So far, only the corporate entities were required to deduct TDS at 10% on rent paid in excess of Rs. 2 lakh per annum. As per Budget 2017, effective 1st June 2017, individuals, professionals and businessmen will also be required to deduct TDS at the rate of 5% on rent paid in excess of Rs. 50,000 per month. You can use tax calculator online to identify the tax amount you have to pay on housing loan.

GST cut from 12% to 8% on houses under PMAY Pradhan Mantri Awas Yojana

The GST council has decided to reduce GST rates from 12% to 8% for homes purchased under the PMAY (Pradhan Mantri Awas Yojana) or Credit Linked Subsidy Scheme (CLSS), starting January 25. Under-construction homes that are a part of CLSS will now be charged GST at 8 percent, down from 12 percent. Those eligible for CLSS under PMAY, will be eligible for this tax benefit.
The lower rates of 8% will be applicable on houses constructed or acquired under the CLSS for Economically Weaker Sections (EWS) / Lower Income Group (LIG) / Middle Income Group-1 (MlG-1) / Middle Income Group-2 (MlG-2) under the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana (PMAY Urban).
The inputs and the capital goods used in the construction of houses attract a GST of 18% or 28%. As opposed to this, the affordable housing projects will now be charged 8% after deducting one-third of the amount charged for the house towards the cost of land. The lowering of GST will help both builders and buyers. The builders or developers now have enough incentive to comply with the system, while the tax burden on borrowers stands reduced.

Home Loan News - Jul 2019
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