Own a dream home and save on taxes as well

(Source: Economic Times, Mumbai, 10th September)

Preeti Bhatnagar and Dinesh Daga (Ernst & Young)

AGAINST the backdrop of rising property prices and interest rates, borrowers need to be aware of the tax benefits from home loans. Tax breaks can be availed of on both components of the loan installment — principal and interest. Tax benefits, in respect of repayment of the principal amount and interest payments, are provided under Section 80C and Section 24 of the Income Tax Act, 1961, respectively. For claiming a deduction of the principal amount, the loan can be taken for purchase or construction of the house property and from specified lenders, such as central or state governments or any bank. Further, deduction for interest can be claimed not only on loans taken for purchase or construction of house property, but also for repair, renewal or reconstruction of the existing house property. Let us illustrate: Abhishek Sen takes a bank loan of Rs 18 lakh for construction of residential house property on November 1, 2006. For the sake of simplicity, let us assume that he is required to repay this loan in monthly instalments of Rs 25,000 (Rs 15,000 of principal amount+Rs 10,000 of interest) over a period of 10 years. The construction of the property is to be completed on September 30, 2009. Principal: The borrower can claim a deduction of the principal sum and stamp duty, registration fee and other specified expenses incurred for the purpose of transfer of the house property to him. The deduction can be availed of, starting from the financial year in which the house property is purchased or the construction thereof is completed, up to a maximum limit of Rs 1 lakh per year. Therefore, from FY09-10 onwards, Abhishek can claim deduction for the actual principal payment or Rs 1 lakh per year, whichever is lower. Interest: The borrower can also claim a deduction for the interest due on the housing loan starting from the financial year in which the purchase, construction or the repair, renovation, etc, takes place. In case of self-occupied property, the borrower can claim interest up to Rs 1.5 lakh per year on loan taken on or after April 1, 1999, for acquisition or construction of the property, provided the acquisition or construction is completed within three years from the end of the financial year in which the loan was taken. For loans taken before April 1, 1999, the deduction is Rs 30,000 per year. In case of let-out property, the borrower can claim interest on actual basis. Further, interest incurred for the pre-acquisition or pre-construction period can be claimed equally for 5 financial years starting from the year in which the property is acquired or construction is completed. However, the total interest deduction cannot exceed Rs 1.5 lakh per year. In Abhishek’s case, deduction for the interest of Rs 1.2 lakh per year can be claimed from FY09-10 onwards. The interest for the preconstruction period being Rs 2.9 lakh (Rs 10,000 per month for 29 months) can be claimed as a deduction in five equal instalments of Rs 58,000 per year from FY09-10 onwards, subject to aggregate limit of Rs 1.5 lakh per year. How to claim: The above deductions can be claimed by the borrower on the basis of a certificate issued by the lending institution, stating the principal amount paid and the interest amount due for that particular financial year. Other aspects: A few other points which a borrower should keep in mind are: • Sale of property: If the property is sold before 5 years from the end of the financial year in which possession of such property is obtained, the deduction allowable for principal amount will no longer be available and deduction allowed in earlier years for the principal sums will be considered as the borrower’s income of the financial year in which the property is sold. • Pre-payment of loan: In case of complete or partial pre-payment of loan, the above provisions would continue to apply up to the year the loan is alive; once the loan is entirely paid, no tax benefits can be claimed in subsequent years. • Property under construction: Principal amount repaid before construction is not eligible for deduction; however, pre-construction interest can be claimed in the period after completion of construction.