Tax Benefits

When buying a property with loans from specific financial institutions, tax authorities provide certain benefits and exemptions from tax payments.

Section 24: Income Tax Benefit on Interest on Home Loan

Section 24 of the Income Tax Act states Tax Benefit on Home Loan for payment of Interest is allowed as a deduction. As per Section 24, the Income from House Property shall be reduced by the amount of Interest paid on Home Loan where the loan has been taken for the purpose of Purchase/ Construction/ Repair/ Renewal/ Reconstruction of a Residential House Property.

The maximum tax deduction allowed under Section 24 of a self-occupied property is subject to a maximum limit of Rs. 1,50,000. However, in case the property for which the Home Loan has been taken is not self-occupied, no maximum limit has been prescribed in this case and the taxpayer can take tax deduction of the whole interest amount under Section 24.

Please Note: In case a property has not been self-occupied by the owner by reason of the fact owing to his employment, business or profession carried on at any other place, he has to reside at that other place not belonging to him, then the amount of tax deduction allowed under Section 24 shall be Rs. 1,50,000 only.

It is also important to note that this tax deduction of Interest on Home Loan under Section 24 is deductible on payable basis, i.e. on accrual basis. Hence, deduction under Section 24 should be claimed on yearly basis even if no payment has been made during the year as compared to Section 80C which allows for deduction only on payment basis.

Income Tax Treatment for Pre Construction Interest

In many cases, amount is paid for the purchase of property even before the construction is completed. Some home buyers even take loan for this amount and start paying EMI to the Bank. In such cases, Section 24 very specifically states that Tax Deduction for payment of Interest shall not be allowed before the construction is complete. In such cases,

  • If Loan is taken for purpose of Repair/ Renewal/ Reconstruction: No Tax Deduction allowed for Interest paid before Completion
  • If Loan is taken for the purpose of Purchase/ Construction: The Interest that has been paid before the completion of construction should be aggregated and the whole aggregated amount shall be allowed as tax deduction in 5 equal installments for 5 successive Financial Years starting from the year in which the construction has been completed.

Section 80c: Tax Benefit On Home Loan (Principal Amount)

The amount paid as Repayment of Principal Amount of Home Loan by an Individual/HUF is allowed as tax deduction under Section 80C of the Income Tax Act. The maximum tax deduction allowed under Section 80C is Rs. 1,00,000 only. This tax deduction of Rs. 1,00,000 is the total of the deduction allowed under Section 80C and includes amount invested in PPF Account, Tax Saving Fixed Deposits, Equity Oriented Mutual funds etc.