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Claim income tax exemption on home loan interest payments
September, 03rd 2015

We are assuming that the possession of the property has been taken and have considered it as a self-occupied property. In that case, deduction towards interest on a housing loan is restricted to Rs.2 lakh per financial year (FY). This cap includes interest paid on loan during pre-construction period (interest for the period prior to the FY of possession).

One can claim deduction towards interest paid for the pre-construction period in five equal annual instalments starting from the year of possession or acquisition. This one-fifth amount needs to be added with the interest paid during the year and the total should be reflected as interest payable on borrowed capital in the house property schedule.

In cases where there is still a loss to be carried forward after applying the set-off provisions, it should be disclosed in the carry forward loss schedule.

When calculating income tax for any year, some savings or investments are deductible from the total income, and others are deductible from taxable income. Which are these?

—M. Ibrahim Khan

Payments or instruments that qualify for exemptions and deductions from income under the Income-tax Act, 1961, for individuals, include:

-Interest on home loan as deduction from house property income.

-Gains from sale of house is exempt from long-term capital gains tax if re-invested in buying or constructing a house.

-Long-term capital gains invested in specified bonds (redeemable after three years), qualify for exemption.

All the above apply under certain conditions.

Investments or payments that qualify for deduction from taxable income within an overall limit of Rs.1.5 lakh per annum, include:

-Public Provident Fund (PPF), recognized provident funds, equity-linked savings schemes (ELSS), life insurance premiums, unit-linked insurance plans, five-year deposit with a post office or scheduled bank under a notified scheme, tuition fees, repayment of housing loan taken from prescribed lenders.

-Contributions to certain approved pension funds of LIC and other insurers, but pension income received is taxable.

-Contribution to New Pension System (NPS) up to 10% of specified salary. An additional deduction of Rs.50,000 is also allowed, making the overall eligible deduction Rs.200,000.

An individual should evaluate all factors such as return on investment, periodicity of return, and lock-in period before choosing the investment option that best suits her needs and objectives. Tax saving alone cannot be the deciding factor.

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