Source: The Economic Times
You can take a housing loan either for purchase or construction of property. The loan is paid back in installments where the amount includes the principal component and the interest due on the loan. You can claim deduction for the principal as well as the interest amount from your income and in turn, reduce your tax liability.
Consider this- Mehak takes a bank loan of Rs 12 lakh at a fixed rate on November 1, 2006, for the construction of a residential house (for self-occupation ). For the sake of simplicity, let's assume that she is required to repay this loan in monthly installments of Rs 18,000 - comprising Rs 12,000 of principal amount and Rs 6,000 of interest - over a period of 12 years. The construction of the property is to be completed on September 30, 2009. Subject to certain conditions, Mehak can start claiming deduction for the principal amount paid and the interest amount due, from the financial year 2009-10 onwards.
Interest:
You can claim deduction for interest amount on a housing loan on 'due' basis. Interest deduction is available not only on the loan taken for purchase or construction of property, but also on loan for repair, renewal or reconstruction of existing property. In case of a self-occupied property financed by a housing loan or a property which cannot be occupied due to employment, business or profession being carried out in a city other than the city where the property is situated, you can claim interest deduction from income up to a maximum of Rs 30,000 per year. However, the said property should not be let out and no other benefit should be derived from such property. A higher deduction of up to Rs 1.5 lakh per year can be claimed if the loan is taken (for acquisition or construction only) after April 1, 1999 and the acquisition or construction of the property is completed within three years from the end of the financial year in which the loan is taken. However, in case of property that is let out, you can avail deduction for the actual amount of interest. There is no maximum ceiling prescribed on the same.
It is important to note that you can start claiming the interest deduction only from the financial year in which the event occurs, that is, when the property is acquired or construction or reconstruction is completed. With respect to the interest for the pre-acquisition or pre-construction period, the interest deduction can be claimed equally over a period of five financial years, starting from the financial year in which the event occurs. In Mehak's case, the pre-construction period is from November 1, 2006 to March 31, 2009. Assuming that the total interest for the said period is Rs 2,78,400, the interest that can be claimed as deduction in five equal yearly installments is Rs 55,680. Hence, Mehak can claim the deduction of Rs 55,680 along with the interest for each year, during the financial years 2009-10 to 2013-14 subject to the limit of Rs 1,50,000.
Principal:
You can claim deduction of the principal portion of the housing loan -- taken only for purchase or construction of the residential house - together with amount paid for stamp duty, registration fee and other expenses for the purpose of transfer of the purchased property from the financial year in which the event occurs. The maximum deduction allowed in a financial year is Rs 1 lakh under Section 80C of the Income-tax Act, 1961. In order to claim the deduction, you should not sell the property in question before the expiry of five years from the end of the financial year in which you acquired the possession of the property. If you do so, the deduction will be discontinued and amount allowed earlier as deduction will be considered as your income. In the above example, Mehak cannot sell the property till March 31, 2015.
Principal portion can be clubbed with amount paid for stamp duty, registration fee, other expenses for purpose of transfer of purchased property from the financial year in which the event occurs Maximum deduction allowed in a financial year is Rs 1 lakh U/S 80C of the Income-tax Act No deduction if you sell property before expiry of five years from the end of the financial year in which you got possession of property Interest In case of self-occupied property, interest deduction is up to a maximum of Rs 30,000 p.a. Rs 1.5 lakh p.a. deduction if loan is taken after April 1, 1999, and acquisition or construction of property is completed within 3 years For property that is let out, deduction is for actual amount of interest With respect to interest for pre-acquisition or pre-construction period, deduction can be claimed equally over a period of 5 financial yrs
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