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Tax benefits
home loans

Tax Benefits on Home Loan in India

A very important criterion to be kept in mind while taking a home loan is the Tax Benefit on Home Loan. In the union budget announced on 1st Feb 2017, the Finance Minister has made significant changes with respect to tax benefit on home loan.

So, here we will discuss about these changes and further tax benefits on home loan.


Some points we will discuss here—

  • Tax benefit on home loan for under construction property before possession
  • Tax benefit on home loan for individual applicant
  • Tax benefit on home loan for co-applicant, co-borrower and joint owner
  • Tax benefit on home loan for second home

 Tax Benefits on Home Loan


 Tax benefit on home loan for under construction property before possession

Booking an apartment which is under constructed is sometimes cheaper.

If you have taken a home loan for purchasing under construction property, you can claim tax deduction on the interest paid during the construction year after construction is completed and property possession is given to you but there is no tax deduction on principal repaid during the construction period.

According to Section 24 of IT Act, you can claim deduction against the interest amount that you have paid on your housing property during the pre-construction period.


The total interest paid during the pre-construction period is allowed for tax deduction in five equal installments during five succeeding years from the year in which construction is completed and property possession is given to you. The total interest allowable during these five years will still be capped at Rs. 2 Lakh per year for self-occupied house.


According to section 80C, no deduction against the principal amount will be allowed for the pre – construction period.

Expenses towards repair and maintenance are not allowed as a deduction under income from house property. However, a standard deduction @ 30% of gross value is allowed to compensate for repair and maintenance expenses of a house property. This is allowed irrespective of actual expenses. Click here to read about How to deduct TDS through home loan.



Tax benefit on home loan for individual applicant

EMI is typically divided into principal and interest.


Principal is allowed as deduction from your gross total income (subject to an overall cap of 1.5 lakh with other eligible investments).Interest payable on self-occupied property is subject to a maximum deduction of 2 lakh under the head ‘income from house property’.


It can be set off against other income, in the same year. This reduces your tax liability. But to claim this, it is essential that the acquisition or construction is completed within 5 years from the end of the financial year in which the loan was taken; else the deduction will be limited to 30,000. Additional deduction 50,000 for interest paid shall be allowed for first time buyers if certain conditions are fulfilled.



Tax benefit on home loan for co-applicant, co-borrower and joint owner

A house can be purchased in joint ownership. Similarly, you can also include a joint applicant to take a home loan. Doing so not only improves the potential amount of the loan, it also allows both the borrowers to become eligible to claim tax benefit against the same house.

Usually, banks allow you to take a joint loan with your partner, parents and children. Some banks may even allow brothers to take joint loan. Most banks wouldn’t allow you to take joint loans with your sister or friends.

If the home loan that you have taken is in joint names then you can save more tax as compared to when you have taken home loan individually. In this case, each of the applicant and the co-applicants can avail tax benefit individually.


Each applicant and co-applicant can separately claim a maximum tax deduction of Rs. 1.50 lakh per annum for principal repayment under Section 80C and Rs. 2 lakh per annum for interest payment, under Section 24. In case you have a working son/daughter and the bank is willing to split the loan in three co-applicants, all three co-applicants can avail deduction up to Rs. 2 lakh each on self-occupied property.


The house should be registered in the name of both the borrowers. The share of rights over the property should also be clearly mentioned in the registry papers. The division of interest can be claimed in the same proportion in which the asset is owned by each co-applicant. Click here to read about Is deduction allowed for stamp duty & registration charges. 



Tax benefit on home loan for second home 

Tax benefit on loan reimbursement of second house will be restricted to Rs 2 lakh per annum.


Finance Bill 2017 has planned a move by which it may hit hard for those assesse who assembles big savings by investment in second home for tax saving purpose as earlier there was no limit for tax benefit on second home.


As per the proposal, the owner can set off of loss towards second home against other heads of income up to Rs 2 lakh under Section 71 of the Income Tax Act.


Under the present dispensation there is no such limit for set off of loss from house property, which is mainly the difference between the rental income and interest on home loan. In other words, a buyer could deduct the entire net interest paid on the home loan.

Earlier the question was whether the government was subsidising first-time home owners who were occupying own house or the government were subsidising the second acquisition of the property by people who have surplus money to invest in real estate. But by this move, The Government is equalized both home owner (whether he is first time home owner or second time home owner).

But by this, individual tax payers will be having loss of tax benefit on the interest amount exceeding Rs. 2,00,000/-

In case of non-self occupied property, the interest paid is reduced from the rent paid to arrive at the income from house property. In some cases, it may happen that the Interest paid is more than the rent earned which will result in loss from house property. This Loss is allowed to be set-off with Income from any other head.


The income tax act says that those who own more than one property must treat one of them as rented property. Basically only one property can be treated as self-occupied and others have to be assumed to be rented.


Tax has to be paid on notional rent. A lot of people, who own two properties, assumed the loaned property as rented and managed to claim the entire interest as deduction. Such taxpayers can no longer do so.




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