Tax Benefits for Individuals Taking Home, Education or Personal Loans
The escalating real estate values, education fees has made most of the home buyers and students turn towards home loans, education loans and personal to acquire their dream property or carry forward their education. This has lead to the vicious cycle of EMI for loan payers. However there are tax benefits given to home buyers seeking loan.
Deduction on interest:
Loans come with interest amount. This part can be claimed as a deduction. To claim such an exemption, the person should be the owner and also the borrower of the loan. The claim can be done from the year, the construction of the house is completed. The interest payment is considered as loss in income through home property. The loss can be adjusted along with the other sources of income which includes salary.
Deduction on principal amount:
Under the section 80 C, the part of EMI which is towards principal amount repayment can be claimed for deduction. The sum of money paid as principal for a year is calculated and upto 1.5 lakh is available as deduction.
Deduction on stamp duty and registration charges
The amount paid for stamp duty and registration is also a part of tax deduction under section 80 C. However the deduction can be made only on the year when the charges for stamp duty and registration were paid.
Deduction on pre construction interest
Deduction for interest can only be claimed if the construction is completed. There are certain cases in which pre construction interest can be claimed from the year the construction is completed in five equal installments. The total deduction should not exceed INR 2 lakh. This has to be done when the house is being used by the borrower for his or her residence.
Tax benefits for processing fee:
Under section 24 all the processing fees, service fees or prepayment fees is allowed for deduction.
Tax incentives for first-time home buyers
The Union Finance Minister Arun Jaitley has presented the Financial Budget for the year 2016-17. The government has given special attention to first-time home buyers.
First time home buyer will get tax benefit for purchase of their first home which costs less than 50 lakh. The first time buyers will get interest deduction of INR fifty thousand for loans up to 35 lakh. However the entire value of the property should not exceed fifty lakhs
The government has created this incentive to enable more people to buy properties. This scheme was introduced to attract more people to buy properties and boost the real estate sector.
The amendments to the income tax act will be applicable to the home buyers from April 1 2016. The real estate sector has welcomed this move of the government.
Tax benefits for home renovation or repair
If any loan is taken for the renovation for the property then a maximum of INR 30,000(over the interest repayment) can be obtained as deduction. There is no benefit for principal repayment. This is also not applicable after obtaining the completion certificate or after the property has been occupied or rented out.
Benefits in case of dual ownership
All the above mentioned tax deductions can be obtained even if the house is co-owned by two people for example husband and wife. If both of them are employed they both can claim tax exemption over their income.
How are losses adjusted?
As an example, if the income of the individual is INR 10 lakhs and he or she pays 1.8 lakh as home loan which can be claimed for tax deduction. Then the net taxable income becomes INR 8.2 lakhs.
Tax benefits for two home loans:
One can avail the above mentioned benefits for two housing loans. The benefit under section 80 C will be limited to 1.5 lakh while the interest repayment part will be limited for 2 lakhs for the first house and no limit for the second house which is let out.
Can the benefits be reversed?
Yes, the benefits and tax exemptions obtained over housing loans can be reversed if the property is sold before 5 years. The 5 year period is calculated based on the financial year the property came into possession of the owner. All the tax benefits obtained will be added to the income of the tax year in the following financial year in which the property was sold. Along with this the any capital gains obtained through the sale will also be added.
What if the property is not occupied by the owner who pays the loan?
The deduction for principal repayment will remain the same. There is no limit on deduction for the interest repayment part.
Loan from a friend for housing
The deduction over interest is applicable if the loan is obtained from a friend in such case the person should provide proof for obtaining loan and interest from the friend. The deduction is not available on principal. Therefore it is advisable to take loans from authorized banks.
Tax benefits for education loans
Unlike home loans the deductions are applicable only on the interest amount and not on the principal amount. This exemption is provided in accordance with the section 80 E of income tax act, 1961. This is applicable for an individual going for higher education with no limit on the amount obtained as loan.
The tax benefit can be availed for a period of 8 years or until the completion of total repayment period. In case the loan repayment is over before the competition of 8 years only for that period deduction can be claimed.
Tax benefits on car loans
For salaried class no exemption is available over car loans. A deduction on the amount of tax paid can be claimed by people who are self employed or business people who have purchased the car for business purpose. For example, an engineer working in a private firm buys a car for his travel from work to home, he or she cannot claim any deduction. But a business person brought a car and declares his earnings under section 80 C can claim deduction over the interest repayments.
Tax benefits on Personal loans
Personal loan deductions are applicable only if the person has a declared business and earnings or for the interest on loan repayment of property construction.
About the Author:
Anand Rajendran is the Head of Communications at Uptra Consultancy Services, which is a leading provider of legal services, including company registration in India.