2016 is looking to be one of the best years for home buyers.
More tax benefits, rate cuts on loans, stagnant property prices, and new
launches in the 'affordable' segment with freebies and attractive payment
schemes. Many of you will be looking to take advantage of these benefits and
buy a house. While hunting for a house at the right price, you'll be haggling
with the bank to cut a loan deal too. Even if you get a discount on both, your
tax bill can burn a hole unless you know the rules well. Here goes a list of
six lesser known and often-missed tax benefits on home loans.
1. You can claim tax
benefit on interest paid even if you missed an EMI.
Unlike the deduction on property taxes or principal
repayment of home loans, which are available on 'paid' basis, the deduction on
interest is available on accrual basis. Meaning, even if you have missed a few
EMIs during a financial year, you would still be eligible to claim deduction on
the interest part of the EMI for the entire year."Section 24 clearly
mentions the words "paid or payable" in respect of interest payment
on housing loan. Hence, it can be claimed as a deduction so long as the
interest liability is there," says Kuldip Kumar, partner-tax, PwC India.
However, retain the documents showing the deduction so that you can
substantiate if questioned by tax authorities. The principal repayment
deduction under Section 80C, however, is available only on actual repayments.
2. Processing fee is
tax deductible.
Most taxpayers are unaware that charges related to their
loan qualify for tax deduction. As per law, these charges are considered as
interest and therefore deduction on the same can be claimed."Under the
Income Tax Act, Section 2(28a) defines the term interest as 'interest payable
in any manner in respect of any money borrowed or debt incurred (including a
deposit, claim or other similar right or obligation)'. This includes any
service fee or other charge in respect of the loan amount," says Kumar.
Moreover, there is a tribunal judgment which held that processing fee is linked
to services rendered by the bank in relation to loan granted and is thus
covered under service fee. Therefore, it is eligible for deduction under
Section 24 against income from house property .Other charges also come under
this category but penal charges do not.
3. Principal
repayment tax benefit is reversed if you sell before 5 years.
You score negative tax points if you sell a house within
five years from the date of purchase, or, five years from the date of taking
the home loans. “As per
rules, any deduction claimed under Section 80C in respect to principal
repayment of housing loan, would get reversed and added to your annual taxable
income in the year in which the property is sold and you will be taxed at
current rates," says Archit Gupta, CEO, and ClearTax.in. Thankfully, the
loan amortization tables are such that the repayment schedule is interest heavy
and the tax-reversal rule only apply to Section 80C.
4. Loans from
relatives and friends are eligible for tax deduction.
You can claim a deduction under Section 24 for interest
repayment on loans taken from anyone provided the purpose of the loan is
purchase or construction of a property. You can also claim deduction for money
borrowed from individuals for reconstruction and repairs of property. It does
not have to be from a bank. ""For tax purposes, the loan is not
relevant, the usage is. The taxpayer should be able to satisfy the assessing
officer how the loan has been utilized for constructing or purchasing a house
property and completion of construction was within five years and other
conditions are met," says Gupta. Remember, the lender must also file an
income-tax return reporting the interest income and paying tax on it. "The
interest charged should be reasonable and a legal certificate of interest
should be provided by the lender along with name, address and PAN," says
Gupta.This rule, however, is only applicable for interest repayment. You will
lose all tax benefits for principal repayment if you do not borrow from a
scheduled bank or employer. The additional benefit of Rs 50,000 under Section
80EE is also not available.
5. You may not be
eligible for tax break even if you are just a co-borrower.
You cannot claim a tax break on a home loans even if you may
be the one who is paying the EMI. For one, if your parents own a property for
which you are paying the EMIs, you can't claim breaks unless you co-own the property.
"You have to be both an owner and a borrower to claim benefits. If either
of the titles is missing you are not eligible," says Gupta. Even if you
own a property with your spouse, you can't claim deductions if your name's not
on the loan book as a co-borrower.
6. You can claim
pre-construction period interest for up to 5 years.
You know you can start claiming your home loans benefits
once the construction is complete and you receive possession. So, what happens
to the installments you made during the construction or before you got the keys
to the house? As per rules, you cannot claim principal repayment but interest
paid during the period can be accrued and claimed post-possession."The law
provides a deferred deduction on the interest payable during pre-construction
period. The deduction on such interest is available equally over a period of 5
years starting from the year of possession," says Vaibhav Sankla,
director, H&R Block.
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