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Tax Tips – Tell me…"What are the tax benefits of taking a home loan and owning property?"

Each monthly home loan installment you pay back to your lender consists of two components: part repayment of the original loan (technically called the principal repayment), and interest on the loan. Both the principal and interest payments entitle you to certain tax deductions.

The deduction for principal repayment is allowed under Section 80C and the amount of the deduction is Rs.1 lakh per annum. If you take this entire deduction towards principal repayment, then you cannot avail of any other 80C option like an ELSS or insurance policy. If you take a part deduction towards principal repayment then the balance amount can be spread across other 80C options.

The deduction for annual interest payments is allowed under Section 24(b). You can avail of this deduction under the following two scenarios:

• Deduction for interest payment is allowed from the year in which the property is purchased or the year in which the construction is complete.
• The interest paid from the date of the loan and up to the beginning of the financial year in which property is purchased or construction is completed shall be allowed 1/5th in next successive five years along with the interest repayment of that particular financial year.

The annual deduction limit is Rs.1.50 lakhs on interest repayment for self occupied property for any particular year including 1/5th interest of construction period.

As shown below the 1/5th of interest paid during construction period plus entire interest paid during the current financial year cannot exceed Rs.1.50 lakhs in case of self occupied property.

Please note that the Rs.1.50 lakhs limit is restricted to Rs.30,000 if the construction is not complete within three years from date of loan.

If you let-out your house the interest deduction shall be allowed in full, i.e. what ever interest you’ve paid in the current financial year plus 1/5th of the interest paid during construction period shall be allowed in full, without any cap of Rs.1.50 lakhs.

Lets take an example. Shyam took a home loan for a house that he has let out. He paid home loan interest of Rs.3 lakhs during the current financial year. The interest paid during construction period was Rs.5 lakhs. Since Shyam has let-out the house, the deduction available shall be the entire amount of interest paid during current period and 1/5th of interest paid during construction period, i.e Rs.4 lakhs (Rs.3 lakhs plus 1/5th of Rs.5 lakhs).

If the property was self-occupied by Shyam, then the maximum allowable deduction would have been restricted to Rs. 1.50 lakhs.

When you own more than one residential property then you can claim either of them as self-occupied, and the other one shall be deemed to be let-out.

For the self-occupied property, the interest deduction is restricted to a maximum of Rs.1.50 lakhs.

For the property that is deemed to be let-out, a notional rent that the property is expected to generate shall be taken as the rental income of this property from which interest deduction shall be allowed. Like in the case of actual let-out property, the entire interest deduction shall be allowed without the cap of Rs.1.50 lakhs.

In case you co-own a property with another person and the ownership share between the co-owners is pre-determined and known then it is assumed that there are two separate properties according to the share of each co-owner. All the benefits shall be allowed for two separate properties.

For example, Gita and Shyam, a married couple, co-own a self-occupied apartment in Delhi in the ratio of 40% : 60%. Both pay EMI towards the loan they have outstanding on this apartment. Both are allowed a deduction up to Rs.1.50 lakhs each in their individual tax returns. If this property had been let-out, as shown in an above answer, there will not be cap of Rs.1.50 lakhs as the interest deduction can be taken in full.

Tax Tips – Tell me…"What do I need to know about HRA and taxes?"
Tax Tips Tell me "What do I need to know about HRA and taxes?"
How To Calculate Your Income Tax Liability in India For Year 2008-09

Yes. If you have taken a loan for major repairs and renovation and have taken loan for the purpose, then interest payment shall be allowed as deduction up to Rs.30.000. Please note that the repair has to be major or something that results in substantial change in the structure. For instance, constructing a new floor is a major repair, but whitewashing your house in not.

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poly said : 17/05/2012	It is dream of every one that to have their own home,now you can make it reality with the help of loans and make you dream true,
Raghu VAmsi said : 27/12/2010	Want to check the personal loan intreste
Rajiv said : 22/09/2010	1) If person co-owns a property, the deduction on interest paid is in ratio of ownership and not 1.5 lacs each. Can you please check and confirm. 2) i have urchased a new property (under construction for next 3 years). What will be the impact on Interest payment here?
Aloke said : 24/07/2010	Was looking specifically for this info for doing my father's tax filing. This article has given the most precise and clear explanation of the rule. Info on some of the other websites out there, are so unclear. Thanks so much for putting this up.
Krishna said : 08/04/2009	You can pay the rent to your son and show the HRA exemption. That can be allowed.
Mahesh said : 10/02/2009	If I stay in a house on my son's name, son not staying in this house, can I take notional rental value , elctricity and water bills , as my expenses while computing tax liability