Source: The Economic Times
2016
is looking to be one of the best years for home buyers. More tax benefits, rate
cuts on loans, stagnant property prices, and new launches in the 'affordable'
segment with freebies and attractive payment schemes. Many of you will be
looking to take advantage of these benefits and buy a house. While hunting for
a house at the right price, you'll be haggling with the bank to cut a loan deal
too. Even if you get a discount on both, your tax bill can burn a hole unless
you know the rules well. Here goes a list of six lesser known and often-missed
tax benefits on home loans.
1.
You can claim
tax benefit on interest paid even if you missed an EMI. Unlike the
deduction on property taxes or principal repayment of home loan, which are
available on 'paid' basis, the deduction on interest is available on accrual
basis. Meaning, even if you have missed a few EMIs during a financial year, you
would still be eligible to claim deduction on the interest part of the EMI for
the entire year. "Section 24 clearly
mentions the words "paid or payable" in respect of interest payment
on housing loan. Hence, it can be claimed as a deduction so long as the
interest liability is there," says Kuldip Kumar, partner tax, PwC India.
However, retain the documents showing the deduction so that you can
substantiate if questioned by tax authorities. The principal repayment deduction under Section 80C, however, is
available only on actual repayments.
2.
Processing fee
is tax deductible.
Most taxpayers are unaware that charges related to their loan qualify for tax deduction.
As per law, these charges are considered as interest and therefore deduction on
the same can be claimed."Under the Income Tax Act, Section 2 (28a) defines
the term interest as 'interest payable in any manner in respect of any money
borrowed or debt incurred (including a deposit, claim or other similar right or
obligation)'. This includes any service fee or other charge in respect of the
loan amount," says Kumar. Moreover, there
is a tribunal judgement which held that processing fee is linked to services rendered
by the bank in relation to loan granted and is thus covered under service fee.
Therefore, it is eligible for deduction under Section 24 against income from
house property .Other charges also come
under this category but penal charges do not.
3.
Principal repayment
tax benefit is reversed if you sell before 5 years. You score negative tax
points if you sell a house within five years from the date of purchase, or,
five years from the date of taking the home loan." As per rules, any
deduction claimed under Section 80C in respect to principal repayment of housing
loan, would get reversed and added to your annual taxable income in the year in
which the property is sold and you will be taxed at current rates," says
Archit Gupta, CEO, ClearTax.in. Thankfully,
the loan amortisation tables are such that the repayment schedule is interest
heavy and the tax-reversal rule only apply to Section 80C.
4.
Loan from
relatives and friends is eligible for tax deduction. You can claim a deduction under Section 24
for interest repayment on loans taken from anyone provided the purpose of the
loan is purchase or construction of a property. You can also claim deduction
for money borrowed from individuals for reconstruction and repairs of property.
It does not have to be from a bank." "For tax purposes, the loan is
not relevant, the usage is. The taxpayer should be able to satisfy the
assessing officer how the loan has been utilised for constructing or purchasing
a house property and completion of construction was within five years and other
conditions are met," says Gupta. Remember,
the lender must also file an income-tax return reporting the interest income
and paying tax on it. "The interest charged should be reasonable and a
legal certificate of interest should be provided by the lender along with name,
address and PAN," says Gupta. This
rule, however, is only applicable for principal repayment. You will lose all
tax benefits for principal repayment if you do not borrow from a scheduled bank
or employer. The additional benefit of Rs 50,000 under Section 80EE is also not
available.
5.
You may not be
eligible for tax break even if you are just a co-borrower. You cannot claim
a tax break on a home loan even if you may be the one who is paying the EMI.
For one, if your parents own a property for which you are paying the EMIs, you
can't claim breaks unless you co-own the property. "You have to be both an owner and a borrower to claim benefits. If
either of the titles is missing you are not eligible," says Gupta.
Even if you own a property with your spouse, you can't claim deductions if your
name's not on the loan book as a co-borrower.
6.
You can claim
pre-construction period interest for up to 5 years. You know you
can start claiming your home loan benefits once the construction is complete
and you receive possession. So, what happens to the installments you made
during the construction or before you got the keys to the house? As per rules, you cannot claim principal
repayment but interest paid during the period can be accrued and claimed
post-possession. "The law provides a deferred deduction on the interest
payable during pre-construction period. The deduction on such interest is
available equally over a period of 5 years starting from the year of
possession," says Vaibhav Sankla, director, H&R
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