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How to claim tax benefits associated with home loans?
December, 21st 2015

As the calendar year draws to a close, you may be hearing a familiar internal groan as this is when you have to submit the housing loan statement to your employer. You can claim a number of tax benefits on your first home, provided you are aware of the deductions that you are eligible to claim.

Provided you wade through the nitty-gritties efficiently, you can save taxes and manage your finances better. Following are the points you should keep in mind to claim tax benefits related to your home loan.

Principle repayment

Your EMI comprises of two components–the outgo towards principal amount and interest. You can claim a maximum of Rs 1.5 lakh of the principal component of your EMI under Section 80C of the Income Tax Act.

In case your principal outgo is less than Rs 1.5 lakh, you can invest the balance amount in a tax-saving instrument to exhaust the limit. You must remember that you can claim the benefit only when your house is fully constructed.

Moreover, if you decide to sell your house within five years of taking possession, the deductions claimed during previous years would be treated as income during the year of the sale of property and the same would be reversed.

Interest payment

Under Section 24 of the Income Tax Act, you are eligible for tax benefits of up to Rs 2 lakh for a self-occupied property. The cap of Rs 2 lakh is applicable if your family is living in the house or if your house remains vacant.

Deduction is allowed on fully constructed house only and you would not be able to avail any benefit on under-construction houses till the work is complete. In the pre-construction phase, the interest outgo keeps adding up and you can claim deduction on it in equal installments for five years beginning from the year of taking possession.

However, the tax benefit is available only when the construction is done in a time-bound manner and gets completed within three years of availing the loan. If the construction gets delayed, you will be able to claim deduction only for Rs 30,000 per year.

You have to be both the owner as well as the co-borrower to claim tax benefits. If your property is not self-occupied but leased out instead, there is no ceiling for deduction and you can claim the entire interest amount paid. However, while filing Income Tax returns, you will have to show the rent of the house as income.

How to calculate rental value

Step 1: Calculate total rental income.
Step 2: Deduct municipal taxes.
Step 3: Deduct another 30 per cent towards maintenance charges to get the rental value.

Let us understand this with the help of an example.

Suppose the total rental income is Rs 2,00,000 per year. If you deduct municipal taxes of Rs 30,000, the net annual rent would stand at Rs 1,70,000. After deducting another 30 per cent towards maintenance charges, the taxable amount would be Rs 1,19,000.

Deductions on the basis of ownership

You have to be owner or co-owner of the property to claim tax benefits on interest. In case of co-ownership, the amount of the deduction is based on the share you have in the property. Joint owners can separately claim deduction of Rs 2 lakh each on self-occupied property.

To claim deductions, you will require a certificate from the bank that mentions the details of your principle and interest outgo.

If the second home is vacant

Do you know that even if you have not rented out your second home, it will be taken as a rented property? In such a case, the rental income is calculated as per the market rate after a deduction of 30 per cent towards maintenance charge.

However, if you own a house in one city and stay in another city as your job takes you there, the limit of deduction on interest will remain Rs 2 lakh.
Section 80GG of the IT Act stipulates that one can claim deduction up to Rs 24,000 per year if one’s salary does not have an HRA component.

Deduction on stamp duty/registration

You can also claim deduction for payment of stamp duty and registration under Section 80C of the IT Act. You can claim this only in the year in which you have paid the stamp duty and registration fee.

How to get home loan statement

You can submit the home loan statement to your employer or claim it directly while filing your return. If you have failed to inform your employer in time about interest deduction, you can claim benefits at the time of filing returns.

You may log on to your bank or lender’s website to fill in requisite details and download your home loan statement. You may also request your bank to provide you the physical copy of home loan statement.

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