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Six home loan tax sops you didn't know about
May, 23rd 2016

2016 is looking to be one of the best years for home buyers. More tax benefits, rate cuts on loans, stagnant property prices, 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.

1. 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," says Kuldip Kumar, partner-tax, PwC India . 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.

2. 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," says Kumar. 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 .

3. 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," says Archit Gupta, CEO, ClearTax.in. Thankfully , the loan amortisation tables are such that the repayment schedule is interest heavy and the tax-reversal rule only apply to Section 80C.

4. 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 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," says Gupta. 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.

5. 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," says Gupta. 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.

6. 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 installments 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," says Vaibhav Sankla, director, H&R Block.

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