Whenever we plan to buy a housing property we approach some bank or financial institution to get the Home Loan to fund property. Today people like to go for home loan even if they have enough cash arrangement to buy the property. Why so? There are certain reasons for the same but the most important reason which motivates them to go for home loan is the the Income tax deducations. As a person taking loan on his/her name can claim deductions on the taxes, which results in a significant amount of Income tax saving for the entire tenure of the loan.
Equated Monthly Installment (EMI)
Once our home loan gets approved, bank issues a cheque in the name of the ‘seller of the house’ for the entire loan amount sanctioned for the property in question.
Now comes the repayment schedule, bank divides the total loan amount into small monthly installments called as Equated Monthly Installments (EMIs) to make it easy for the borrower to repay the loan amount.
EMI = Principal Amount + Interest Amount
The Equal Monthly Installment (EMI) consists of two parts – the principal amount, and the interest for the home loan.
With every EMI payment (Principal) against your loan, your outstanding loan amount reduces every month by the value of your EMI. And the interest part of your EMI also reduces, as bank impose interest on the outstanding loan amount. So, with every EMI payment your outstanding loan reduces which directly helps reduces the interest part of the EMI.
As the concept of EMI splits the total loan amount into smaller bits, which makes your initial EMI with bigger interest component and smaller principle component. As interest for the initial months counts on the total loan amount. But with every EMI payment, the interest component becomes smaller than the previous month, and the principle component becomes larger than the previous month. And by the end of the loan tenure, the interest component becomes negligible.
Income Tax Deductions Under Section 80C For Principal Loan Repayment
Section 80C of the income tax act offers a tax deduction upto 1 lakh, which means an amount upto 1 lakh can be deducted from your annual income if it is invested in a qualified investment. Qualified investments includes, Provident Fund(PF), Public Provident Fund (PPF), Life Insurance Premium, Equity Linked Saving Scheme (ELSS), Home Loan Principal Repayment for home etc. Yes, this means you can get tax deduction for your principal loan repayment amount upto Rs 1 lakh from your annual income if you have not made any other investment under section 80C. You can claim a total tax benefit of Rs 1 lakh under section 80C against any qualified investment.
There are few conditions that needs to be followed to get the tax deduction on the principal loan repayment under section 80C.
Purpose Of Housing Loan
Deduction under section 80C for principal loan repayment of the housing loan EMI is valid only for the investors who made this investment for a self occupied house. Which means if the home loan borrowing is for any other purpose like reconstruction, repair, renovation etc then this will not be considered as valid investment. Or you can say this tax benefit is only allowed for buying or constructing a new housing property and not for the extension or renovation of an existing property.
The only exception is, if in case your housing property is not in the city where you are working then in that case you claim the principal repayment amount as an investment under sec 80C even if the house is not self occupied.
- This is even true in case you have rented out your housing property against which you have taken home loan.
- There is no restriction on the number of houses for this benefit – the only restriction is that the house should be self occupied.
Income Tax Deductions Under Section 24 For Interest Payment
As we already discussed there are two parts of EMI, first is the principal amount and the other is interest amount which financial institution charges for lending money. As per section 24 of the income tax act, the interest you pay as part of your EMI is deductible upto Rs 1.5 lakhs. However, the acquisition or construction of the house property should be completed within 3 years from the end of financial year in which home loan was taken; otherwise, the amount of interest benefit allowed is only up to Rs 30,000.
This deduction is allowed only when either the construction gets completed or you get the possession of the property. Interest of pre-construction period is deductible in five equal installments. The first installment is deductible in the year in which construction of property is completed or property acquired. This kind of payment is known as Pre-EMI Interest. For Example, you pay Rs. 30,000, Rs. 20,000 and Rs. 20,000 as pre-EMI interests in years 2005-06, 06-07 and 07-08 respectively. Now, if you get possession in 2008-09. Then, you can claim Rs.14,000 (70,000/5, which is the total pre-EMI interest paid by you) per year.
Unlike in case of Principal loan repayment there is no restriction on self occupied property in case of interest payment for claiming the tax benefit. Which means if you are using that property for self occupancy then you can claim upto Rs 1.5 lakhs for the interest paid. Even if you have any other income from the house like rent then interest is deductible fully without any limit.
For Example, you took a loan against a property which you have rented out and you incur Rs 3 Lakhs as income from house property for the financial year and have paid loan interest of Rs 2.5 lakhs. Then in that case you can claim complete 2.5 lakhs as deduction against interest payment.
Secondly unlike principal repayment, there is no restriction on the number of houses to avail the income tax deductions. The only restriction is the limit of Rs 1.5 lakhs, So if you are paying the EMI for 2 housing properties then also you can claim interest paid upto 1.5 lakhs for both the housing properties.