Everybody wants to have a home of his own. Most buyers, especially young salaried employees, depend on home loans to purchase their first house. Purchasing a house with the help of a home loan is an alternative to conventional investments. While the individual has to pay substantial amount of money as interest, it provides dual benefits ? creation of an asset in form of an ownership of a house and a corresponding tax benefit for the amount of principal and interest payment on home loan, provided certain conditions are met.
How it works
A deduction can be claimed for the interest paid on home loan taken for purchase/construction of a house. While the limit for this deduction was R1.5 lakh, Budget 2014 has proposed an increase in this limit to up to R2 lakh for financial year 2014-15. One of the conditions to claim the tax benefit is that the purchase/construction of house must be completed within three years from the end of the financial year in which the loan was taken.
Moreover, the principal repayment on home loan is also allowed as a deduction from the gross total income under Section 80C of the Income Tax Act, 1961 (subject to an overall cap of R1.5 lakh proposed in Budget 2014 for financial year 2014-15). The limit of R2 lakh is only applicable for a self-occupied house. In case the house is let out, deduction for the entire interest paid on home loan is available.
One of the most common doubts is whether the tax benefit on home loan is available for an individual who owns a house, but has to stay in a rented accommodation in some other city. In such a case, the property that the individual owns would be considered as self-occupied and deduction for home loan interest can still be claimed.
For example, an individual owning a house in Delhi but staying at a rented apartment in Bangalore (where he works) can claim deduction for home loan interest on his Delhi house.
Additionally, interest paid on home loan during the pre-construction period, i.e., period prior to the financial year in which house is purchased or constructed can also be claimed as deduction. Such deduction is available in five equal installments starting from the financial year in which such purchase or construction is completed. For a self-occupied house, pre-construction interest is included under the overall cap of R2 lakh/R30,000 for financial year 2014-15.
Where the house is jointly owned and the loan jointly taken, each co-owner can avail deduction for interest paid on home loan. However, while availing this deduction, keep in mind that a joint owner, who is not a joint borrower, is not entitled to tax benefit. Similarly, a joint borrower, who is not a joint owner, cannot claim tax benefit.
Documents to be
maintained for record
These include the certificate of principal and interest paid for the financial year and for the pre-construction period. Thus, for salaried employees who are staying in a rented house, home loan may be a good option to keep their taxes under check and also create an asset for themselves.
The writer is senior tax professional, EY. Views expressed are personal
