Multiple benefits – how?
EMIs (elementary monthly installments) consist of two parts – the interest portion and principal amount. Interest paid is allowed as a tax benefit under section 24(b) (subject to restrictions), while the principle amount repaid is allowed as a deduction under section 80C.
Maximum ceiling on tax benefit
Maximum tax deduction for repayment principal component of home loan can’t exceed Rs 1, 00,000 under section 80C. One should keep in mind that other investments/contributions are also allowed as a deduction under section 80C, and this limit of Rs. 1, 00,000 applies to all of them put together.
Housing loan interest deduction, on the other hand, is allowed up to a maximum amount of Rs 1, 50,000 under section 24(b). However, the acquisition or construction of the house property should be completed within 3 years from the end of financial year in which loan was taken; otherwise, the amount of interest benefit allowed is only up to Rs 30,000.
Furthermore, the above tax deduction limit u/s 24(b) is applicable only for self-occupied house property. In case of let-out or deemed to be let out house property, interest is deductible without any limit.
Starting date for claiming tax benefit
Some say that deduction on principal component of home loan under section 80C is allowed as soon as one starts repaying the home loan. Some say deduction is allowed only once the construction is completed. The law isn’t clear on the matter; hence the ambiguity remains.
Interest deduction on housing loan under section 24(b) is allowed only on acquisition or completion of the house property. However, interest deduction for pre-acquisition or pre-construction period is also allowed but only after acquisition or construction is complete. It is allowed in 5 equal annual installments. But even after including the above, the total deduction should not exceed Rs. 1, 50,000 per annum.
Source of home loan
Unlike section 24(b), Section 80C doesn’t allow tax deduction for home loans taken from friends and relatives. For claiming tax benefit on principal component of the home loan under section 80C, you need to borrow only from the lenders specified in that section. There is no such restriction under section 24(b) of the IT Act for claiming tax benefit on interest component of the housing loan.
Purpose of housing loan – Home purchase / construction vs.
Home improvement Deduction under section 80C for principal portion of the housing loan EMI is not allowed if the home loan borrowing is for the purpose of reconstruction, renewal or repair of house property. Put simply, tax benefit under section 80C is only allowed for buying or constructing a new home. In contrast, deduction for Interest is allowed under section 24(b) even for the loan taken for the purpose of repair, renewal or reconstruction of existing house property but subject to the limit of Rs 30,000 in case of self-occupied house property. In case of let out house property, actual interest is allowed without any ceiling.
Payment Basis – Due Basis vs. Cash Basis
Tax benefit u/s 80C can be claimed only when the actual payment is made. Interest deduction u/s 24(b), on the other hand, is allowed on accrual or due basis. Put simply, unlike principal portion, interest deduction can be claimed even if not paid.
Restriction on sale of house property
The tax benefit under section 80C is allowed subject to the condition that the said house property should not be sold before a period of 5 years. If you violate this, the deduction will be discontinued and the entire tax deduction claimed in earlier years under section 80C – for repayment of principal component of the home loan – will be deemed to be your income in the year in which you sell the property. However, the same doesn’t apply on the housing loan interest deduction claimed under section 24(b).
Home loan pre-payment: Original loan vs. Subsequent loan
Tax benefit on interest component of the home loans u/s 24(b) is allowed not only for original home loan but also for subsequent loan(s) taken to refinance the first loan. In other words, if the new housing loan is taken to pay off an existing housing loan, tax benefit under section 24(b) is allowed. However, unlike section 24(b), there is no specific mention under section 80C for prepayment of existing home loan by taking a fresh home loan.
So what it means is that when you repay the balance outstanding principal component of your existing home loan by taking a second home loan, you’ll be entitled for tax deduction under section 80C but within the overall limit of Rs one lakh. Further, when you subsequently start repaying your second housing loan, you’ll be entitled for tax benefit only on the interest portion u/s 24(b) and not on the repayment of principal component u/s 80C.