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.
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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 :)
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  • Originally Posted by aksingh79
    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??
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  • 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?
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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.
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  • Originally Posted by player
    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.
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  • 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. :bab (35):
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  • Nice Info

    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.
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  • Originally Posted by HarishD
    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.
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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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  • Originally Posted by ksharma_ind
    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.


    this is news.
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  • Originally Posted by anubhaviit
    this is news.


    This is correct information..
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  • This is applicable in case of Down Payment. If it is a pre-EMI plan then the three year period starts from the date start of the EMI which is after full disbursement / 2 years from the date of first disbursement which ever is earlier.

    Originally Posted by ksharma_ind
    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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  • Originally Posted by kirtikr
    This is applicable in case of Down Payment. If it is a pre-EMI plan then the three year period starts from the date start of the EMI which is after full disbursement / 2 years from the date of first disbursement which ever is earlier.


    So You are saying that we get the IT rebade on down payment from the date of start of EMI even if the possession is due in 3 years ?
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  • It is well known that our home loan EMI divided inti two parts: Principal & Interest.
    Principal part comes under section 80C which max. limit is 1 lacs and Interest part comes under section 24(G) which max. limit is 1.5 lacs as of now.
    There are broadly 2 type of case:

    1. When You got possession of your home: In this case you can avail both benefits (as described earlier), but in this case you cannot avail you HRA.

    2. When your home is under construction: In this case you cannot take Interest Part benefit (comes u/s 24(G)), but you can avail the Principal part (which comes u/s 80C). It is somewhat strange but this is the rule. After completion of your project you can avail the whole Interest part (paid during construction period) in 5 equally divided amount in 5 years and as well as the current Interest part subject to maximum of 1.5 lacs.

    cheers :):):)
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  • The Income Tax Act treats HRA and home loan deductions under separate sections independently. The two are not interconnected to each other. HRA is dealt with in section 10(13A) Rule 2A while home loans are entitled for tax benefits under section 80C (tax benefit on principal repayment) and Section 24 (tax benefit on interest payment) of the Income Tax Act. Hence, feel free to avail both tax benefits accordingly.

    Ajit, currently employed with Company A, is staying in a rented apartment in Mumbai and has bought himself a property in Chennai for which he has taken a home loan. He finds himself in a dilemma while filing tax returns – “Can I claim both HRA and home loan benefits?” This seems to be a confusing factor for most tax payers. When Ajit pays rent, under the Income tax act, he is definitely allowed to claim both HRA and home loan benefits (interest payment and principal repayment).

    Let us evaluate various possible situations an individual can find himself in and understand what the income tax act permits him to do.

    1: You live in your own house

    You have taken a home loan and residing in the house purchased with it. Since you are residing in your own house, you will not be able to claim HRA. However, you will be able to claim tax benefits on both, the principal and interest repaid on the home loan.

    2: You own a house in another city

    This situation was the one faced by Ajit. He resided in Mumbai but had bought an apartment in Chennai taking a home loan. Ajit will be entitled to HRA exemption and tax benefits on both, the principal and interest repaid on the home loan.

    3: Your house cannot be occupied at this point (e.g. under construction)

    You have bought a house in Mumbai taking a home loan and you’re currently living in Mumbai in a rented apartment because the house is under construction. In such a case, you are eligible to claim HRA.

    In the case of tax breaks on the home loan, you can claim tax benefits only for your principal before the completion of your house. Once your house is completed, you can claim tax benefits on the total interest paid upto the date of completion in five equal installments in five years begining from the year of completion.

    4: You have a house which is ready for occupation but you cannot reside in it

    You have bought a house in Delhi taking a home loan and now you aren’t residing in it but are living in a rented apartment in Delhi itself for genuine reasons e.g. the house that you have bought is far away from your office. In such cases, the Income tax act permits the individual to claim HRA and home loan benefits which includes both principal and interest repaid on the home loan.

    Also, please note that if your house remains vacant, then you will still need to pay tax on a notional rent income.

    5: You have rented your own house and currently residing in a rented house

    You took a home loan and your house is now ready for occupation. You have rented the same out while you reside in a rented house. The Income tax act allows you to claim both HRA and home loan benefits. However, in such a case, since you are the recipient of rent because you have let out your own house, that income is taxable at your hands.

    The Income Tax Act treats HRA and home loan deductions under separate sections independently. The two are not interconnected to each other. HRA is dealt with in section 10(13A) Rule 2A while home loans are entitled for tax benefits under section 80C (tax benefit on principal repayment) and Section 24 (tax benefit on interest payment) of the Income Tax Act. Hence, feel free to avail both tax benefits accordingly.

    Now, that we have dealt with all possible situations with regard to availing HRA and home loan tax benefits, let’s take Ajit’s situation as an example to help you figure out how to avail them.

    Claiming tax benefits on a home loan:

    Ajit had purchased an apartment in Chennai for Rs. 38 L three years back. He took a home loan of Rs 32 L to fund this house purchase. So far, this year he has repaid an interest of Rs 3.3 L and a principal amount of Rs. 60,000.

    Section 80C offers tax rebate on home loans upto a limit of Rs 1 lakh and Section 24 on interest upto a limit of Rs 1.5 lakh. So, Ajit can utilize upto Rs.1.5L on his interest paid and avail the tax benefits in full for the amount paid towards principal.
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