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What is Tax Rebate?

A tax rebate or a tax refund is a refund on the taxes when the taxes paid by you are more than your tax liability and normally the refund is paid by the end of the tax year. Taxpayers get a tax refund on the income tax they have paid if the sum of the total amount of the withholding taxes and estimated taxes is more than the tax they owe an different countries have their own policies, however, as far as India is concerned, there is a provision of refund of excess tax along with the interest , however in order to claim the tax refund, one need to file the income tax return within a specified time period.

Tax Rebate on Home Loan

In India everyone dream of having one’s own house one day and works toward owning one someday however there is a difference between dreaming about a house and owning one because later one comes with its fair share of responsibilities and annual payment of house property tax tops the list. However to infuse some oxygen in the situation, Indian government takes special interest in encouraging its citizens to invest in a house and to ensure that it happens on a large scale, the government has introduced many schemes like Pradhan Mantri Jan Dhan Yojana in order to address the issues like affordability and accessibility and has also made home loan applicable for tax deductions under Section 80C of the Income tax Act.

Tax rebate on Home Loan

While you apply for a home loan, you must consider the tax benefit you can avail on the same and in order to understand the repayment of home loan and tax benefits on it, it can be divided into 2 factors such as:

  1. Repayment of the principal amount,
  2. Repayment of the Interest on Home Loan

Tax Deduction On The Repayment Of The Principal Amount

The amount you pay as the repayment of the principal amount of the home loan either as an individual or as a Hindu undivided family is applicable for tax deduction under Section 80C of the Income Tax Act and the maximum tax deduction allowed under Section 80C is Rs 1,50,000 and in order to claim this deduction, the house property should not be sold within 5 years of possession. The amount which you pay as stamp duty and registration charges can also be deducted under Section 80C provided there is no pending loan against you.

However the rebate on home loan under section 80C for the repayment of the principal amount is applicable only if the construction of the house is over and completion certificate has been awarded. No deduction would be granted for repayment of principal for the properties which are under construction and for the years during which the property was under construction. Also in case you have decided to transfer the house property before five years from the date the possession was made, you will not be entitled for any tax deduction and tax benefit on home loan.

Tax Deduction On The Repayment Of The Interest Amount

It is Section 24 of the Income Tax Act which lists the deduction and benefits on home loan for the repayment of interest amount. Under Section 24, you can claim a deduction of up to Rs 2 Lakhs. For the assessment year 2018-19, the maximum deduction for interest paid on the self-occupied house property is Rs 2 lakh whereas there is no upper limit for claiming interest for let out property and your deduction on the interest is limited to Rs 30,000 and not to 2 Lakhs in case below mentioned conditions are fulfilled:

  1. If you have taken the loan on or after 1st April 1999;
  2. Purchase or construction of the house is not completed within 5 years from the end of FY in which you have availed the loan. For example, if you have taken the loan on 30th April 2016, by five year rule, the construction of the house should get completed by 30th March 2022.

Tax deduction of interest amount on home loan under Section 24 is deductible on the payable basis and since the deduction under Section 24 can be claimed on yearly basis even if you haven’t made the payment during the financial year as compared to the Section 80C, it allows for the deduction only on the payment basis. For a self-occupied property and not self-occupied property, different quantum of deductions are allowed for the payment of interest amount on the home loan, such as:

Type of property Not self occupied property Self occupied property
Completion status Completed within 5 years Not completed within 5 years Completed within 5 years Not completed within 5 years
Deductions No Limit No Limit Rs 2,00,000 Rs 3,00,000

Section 24 of the Income Tax Act underlines very specifically that the tax rebate for the payment of interest on home loan is not applicable till the time construction is completed in total and if the house is under construction then in such cases:

  1. If you have already taken the loan for the purpose of renewal or repair or reconstruction, no tax deduction is allowed for the interest which you have paid before the completion of the house.
  2. If you have taken the loan for the purpose for construction or purchase: The interest which you have paid for all the years before the construction is completed is aggravated and tax deduction is allowed on the total aggravated amount for five successive financial years in five equal installments starting from the year in which the construction has been completed.

Important points to remember here are:

  1. No deduction is applicable on the commission you have paid for arranging the loan;
  2. In case you as a taxpayer is not earning any income from house property but are paying taxes such as municipal and other taxes on the home loan, then you can list the same as loss under income from house property, which can further be used to set-off against income from various other heads of the same financial year and in case the loss cannot be set-off against income from other sources in the same financial year, then the losses occurred to you can be carried forward to the next year and set-off against income you get from your house property for the next 8 financial years.
  3. Tax rebate on home loan is available only for the person who has either constructed or acquired the property by taking home loan and not to the successor of the property.
  4. Tax rebate is applicable only when the construction of the house gets completed within 3 years from the date you have take loan.
  5. There is no interest paid for the outstanding amount.

Deduction for Joint Home Loan

In case the home property is co-owned then its joint owners can claim tax deduction on the interest on the home loan up to Rs 2 Lakhs each, also they can avail deduction on stamp duty and registration charges under Section 80C within the overall limit of Rs 1.5 lakhs and in order to claim the tax benefits on the co-joined property, you must be a co-owner in the property and also a co-borrower for the home loan. And as it mentioned in the above lines, the tax rebate on the home loan interest and principal repayment can be claimed only after the construction of the house gets completed and if you see, a joint home loan give you better tax benefits.

Deduction for the first time home buyers

Announced in the Budget 2016 by then Finance Minister Mr Arun Jaitley, Section 80EE of the Income Tax Act allows tax deduction up to Rs 50,000 for those who are buying home for the first time ever, however in order to avail this deduction the loan amount should not be more than 35 lakhs whereas the property value should not be more than 50 lakhs. Deductions or tax rebate under Section 80EE are as per person and not as per property.

Also the deductions for the first time home buyers under Section 80EE will be applicable under below mentioned conditions such as:

  • The home loan should be sanctioned between 1st April 2016 and 31st March 2017.
  • The deduction became available from FY 2016-17 onwards.
  • Benefit of this deduction would be available till the time the repayment of the loan continues.

Deduction in respect of interest paid towards home loan during pre-construction period

In case you have taken a home loan on a property which is under construction and are paying EMIs on it, your eligibility to claim tax rebate starts only when its construction gets completed or if you immediately acquire a fully constructed property, which also means that you won’t be able to enjoy any tax benefits on the interest paid during the time you have borrowed the loan and till the time construction gets completed.

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