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Old July 26 2010, 11:19 PM   #1
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Icon18 Tax Deductions as per IT Act for Home Loans

Hi All,

Can anyone please elaborate what does the It Act say in the case of deductions available for the interest and principal amount payments made for the home loan taken to purchase a property to be used for residential purpose.

Here by PROPERTY I mean, a unit bought under flexi/CLP plan from a builder whose possession is due in 3-4 yrs down the line, but partial/full loan disbursal already done and end user has started paying home loan installments, before the possession.

 
Old July 26 2010, 11:34 PM   #2
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I am not an expert, but as per my knowledge we can avail the home loan benefits only after getting the possession of the flat.

I would be more than happy if i am wrong
 
Old July 26 2010, 11:37 PM   #3
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Quote:
Originally Posted by aksingh79 View Post
I am not an expert, but as per my knowledge we can avail the home loan benefits only after getting the possession of the flat.

I would be more than happy if i am wrong
Unfortunately, even I ve heard the same!!

An expert here can explain in detail. Anyone??
 
Old July 27 2010, 10:50 AM   #4
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Default No tax deduction before possession

It is a correct assessment. You don't get any EMI-linked tax deduction benefits prior to possession. It is a very stupid rule. If I recall, the original purpose of giving tax breaks for housing was to encourage construction activity which creates lot of jobs. Whereas now it is the case that if I take a loan for purchase of a ready-to-move-in property, I get tax exemption. What is the point in giving incentives to past construction activity that is not going to create any new jobs?
 
Old July 27 2010, 11:02 AM   #5
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I am putting here an article published in newspaper a while ago. Hope it helps
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Tax treatment for home loans

The Income Tax Act, 1961 provides for tax benefits for assessees that have home loans. Typically a home loan is repaid to the bank / lender in monthly installments (EMIs). The installment consists of two parts – interest and principal repayment.

The bank gives a detailed worksheet of the loan calculation and of the bifurcation of the EMIs paid by the borrowers. These monthly repayments are qualified for deductions from income tax.

Here is the tax treatment for EMIs paid by the borrower:

Deduction under Section 80C of the Income Tax Act
The portion of the EMI paid towards repayment of principal amount of the loan can be deducted from income. The borrower can get a tax deduction for a maximum amount of Rs. 1 lakh each year under this section irrespective of his tax bracket.

The Act requires the home loan to be towards a property for self occupation. However if the assessee’s city of employment is different from the city where he has purchased a home, he is still eligible for this deduction.

So if Sunil works in Mumbai but has purchased a home in his hometown Nagpur, he can still claim a deduction under this section even if he is not actually staying in this home.


Deduction under Section 24(b) of the Income Tax Act
The interest paid towards home loan is treated as an ‘expense’ under ‘Income from house property’ and is deductible under Section 24(b) from the total income of the assessee. The maximum deduction permitted under this section is Rs.1.5 lakh per annum.

In case of partial disbursement of loan

In cases where some part of the loan is disbursed by the bank during construction stage of the property, the tax treatment is slightly different. This portion of the interest paid prior to completion of construction of property cannot be claimed as a deduction in the year in which it is paid.

However, upon completion of construction, the assessee can claim deduction for this interest under Section 24(b) in 5 equal installments, i.e., 1/5th for each of the five years after the end of construction period. Note that the upper limit on deduction each year remains Rs. 1.5 lakh.

Assume Mr. Sunil purchased a home from Suraksha Developers in FY. 2005-2006.The property was still under construction and was completed only in F.Y 2008-2009. Some amount of loan was disbursed by the bank in FY2005-2006 and Sunil made interest payments of Rs. 1 lakh between FY 2005-2006 and FY 2007-2008. Sunil can claim deduction of Rs. 0.2 lakh for 5 years starting from FY 2008-2009.

In case of total disbursement of loan
If Sunil received the entire loan money in FY 2005-2006, and started paying EMI immediately, he would lose on the principal repayment deduction under Section 80C for the 3 years until construction of the property ends. This is because deduction under Section 80C can be availed only after getting possession of the property.

In case of more than one home loan

If Sunil works in Mumbai and has a purchased a home in Mumbai for which he has taken home loan. Will he still get benefit under the Act for this second home in Nagpur? The answer is ‘Yes’. Benefits under Section 80C and Section 24(b) can be taken for more than one home if all these homes satisfy the requirements of the Act.

The home in Mumbai satisfies the condition of self occupancy while the home in Nagpur comes within the exception of the self occupancy rule that the city of work is different.

Irrespective of the number of homes the maximum limit of Rs.1 lakh for Section80C and Rs.1.5 lakh for Section 24(b) still apply. Note that it does not matter if Sunil gives one home on rent. He will still be able to get the tax break.

In case of joint home loan
What is the tax impact if Sunil has taken the home loan jointly with his father?

In this case both Sunil and his father can claim tax deduction on their return if the home too is jointly owned by them. Tax benefit can be availed in the same proportion as the burden of EMI borne by each.

If Sunil pays 80 per cent of the EMI and his father contributes towards the remaining 20 per cent, the tax deduction will be available in the same proportion.

So if principal repaid during a year is Rs.1L then Sunil can claim Rs. 0.8 lakh under section 80C and his father can claim Rs.0.2 lakh under the even section. If Sunil’s father does not co-own the home, then he will not get any tax deductions for EMIs paid on such loan.
 
Old July 27 2010, 11:08 AM   #6
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Quote:
Originally Posted by player View Post
Unfortunately, even I ve heard the same!!

An expert here can explain in detail. Anyone??
unfortunately that's true. You do not get any tax exemption until you posses the property for which you have taken a loan.

Once possessed you can enjoy tax rebate of 1,00,000 on principal payment of Home Loan and 1,50,000 on interest paid towards the same loan.

However, a tweak which i can suggest you to enjoy this tax rebate is that you can ask for possession letter from your builder and then show that you to IT deptt that you are already in possession of flat while filing your returns/declarations. Although this is suggestive to be applied only if you know that around 80% of construction has been completed and you will surely possess the house in time to come. otherwise you will be at the mercy of developer when penalty clause arises and the construction is delayed.
 
Old July 27 2010, 05:50 PM   #7
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Default Thanks guys!!

Thanks guys!
The aricle posted by Ranjit was really helpful.

So what I understand is that in the property being discussed, we can not claim any deduction for the interest expense paid till possession. However, once we get the possession, we can claim all the interest payments (deduction) in 5 equal annual installments.

However, no rebate is available for the principal payment made prior to the possession.

Hope m right on this.
 
Old July 27 2010, 09:47 PM   #8
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Icon15 Nice Info

Quote:
In case of partial disbursement of loan

In cases where some part of the loan is disbursed by the bank during construction stage of the property, the tax treatment is slightly different. This portion of the interest paid prior to completion of construction of property cannot be claimed as a deduction in the year in which it is paid.

However, upon completion of construction, the assessee can claim deduction for this interest under Section 24(b) in 5 equal installments, i.e., 1/5th for each of the five years after the end of construction period. Note that the upper limit on deduction each year remains Rs. 1.5 lakh.

Assume Mr. Sunil purchased a home from Suraksha Developers in FY. 2005-2006.The property was still under construction and was completed only in F.Y 2008-2009. Some amount of loan was disbursed by the bank in FY2005-2006 and Sunil made interest payments of Rs. 1 lakh between FY 2005-2006 and FY 2007-2008. Sunil can claim deduction of Rs. 0.2 lakh for 5 years starting from FY 2008-2009.
Thanks ranjit, this part of information is very useful.
 
Old July 30 2010, 12:24 AM   #9
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Quote:
Originally Posted by HarishD View Post
It is a correct assessment. You don't get any EMI-linked tax deduction benefits prior to possession. It is a very stupid rule. If I recall, the original purpose of giving tax breaks for housing was to encourage construction activity which creates lot of jobs. Whereas now it is the case that if I take a loan for purchase of a ready-to-move-in property, I get tax exemption. What is the point in giving incentives to past construction activity that is not going to create any new jobs?
harish - this may be just for one sole purpose - to avoid tax exemption in case of Investments in under construction activity. What govt. wants to avoid is that one invest in under-construction projects, make money and also claim tax deduction.
 
Old September 20 2011, 04:37 PM   #10
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If I am not wrong then we can get Tax rebate on home loans only if the you get the possession with in three year from the start of the loan. If the possession is deplayed then you don't get any rebate even after getting the possession. If that is true then isn't it difficult to get tax deduction on a under construction flat in gurgaon. It takes 4-5 years to get the possession.
 
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