A home loan is a big responsibility. Typically for middle
income people it eats away most of their monthly salary. While my dad had a
home loan, it used to consume major portion of his salary. Imagine earning Rs.
20000 and paying 12000 for home loan. I assume most of us will face a similar
situation.
On the other hand, a home loan creates an asset (at least
technically, though it does not give any regular income). The government wants
you to invest and provides lot of income tax deduction and exemptions when
investing in a home. Let us try to understand the benefits one can enjoy on a
home loan from the tax man.
Income tax benefits of a home loan
It is preferable to understand the tax benefits associated
with home loan to benefit from it every financial year. Before beginning with
the details of the benefits that can be enjoyed by an applicant while taking a
home loan, the repayment of home loan falls into two parts/categories:
Repayment of the principal amount
Repayment of the interest
As the repayment falls into two different categories, the
income tax benefits enjoyed by the applicant on the home loan are divided into
various sections of the Income Tax Act. Claiming the tax deduction is possible
using different sections while filing for an income tax return.
Also read: Documents to check when buying a home
Section 80C: Tax Benefit on Home Loan against Principal
Amount
It is possible to claim a tax benefit on home loan for the
principal amount by an individual or HUF under Section 80C of the Indian Income
Tax Act. The maximum allowable deduction under this section is Rs 1.5 Lakh.
There has been an increase in the permissible amount from Rs.
1 Lakh to Rs. 1.5 Lakh during the 2014 Financial Budget.
The tax deduction under this section calculates or is
inclusive of the total amount invested in PPF account, taxes, saving fixed
deposits, equity mutual funds, national savings certificate, senior citizens,
and saving schemes.
The reduction under section 80C is further available as
payment basis, irrespective of the payment year. Furthermore, the registration
fee and stamp duty also falls under tax deduction, even if the applicant has
not applied for a home loan.
The important point is that the applicant should remember is
that the tax benefit is only applicable on the principal amount of the home
loan Emi Calculator
only after completion of the construction. Therefore, it is important to submit
the construction complete certificate to enjoy the tax benefit.
Furthermore, according to this section, the individual will
not be eligible for tax deduction for the years during which the construction
was in the process.
If an individual or HUF chooses a property that is under
construction, because the price is lower than a completed property, one will
still have to compensate the service tax levied on the under construction property.
In addition, the Finance Minister changes the rates of the
service tax on under-construction properties during the 2013 Budget. Meanwhile,
there is no service tax applicable on a completed construction.
However, if the applicant transfers the property for which he
or she claims the tax benefit under Section 80C before 5 years from the date of
possession of the property, there will be no deduction and tax benefit on the
home loan.
The tax deduction claimed on the property for the respective
years will become the income of the applicant. The amount from the sale of the
property also becomes the income the applicant shall pay the tax on such
amount. The tax deduction will depend on the current income tax slab rate as
declared by the government.
Must Read: 7 things to do during home loan closure
Service Tax on under construction property
Service tax on an under construction property is the taxable
amount collected by builders, real estate developers or any other individual
who offers services for selling the unit. However, the payment is due at the
time of construction and before the issuance of building complete certificate
by the competent authority.
Although many developers and real estate companies have
opposed the move, the court ruled the case in the favor of the government.
[Source: http://www.smartmoneygoal.in/blog/income-tax-benefits-of-home-loan/]
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