The maximum possible benefits would be upto INR 2,50,000 (increased from 1,50,000 lacs in 2014 budget) on the interest payment on the home loan and upto a maximum of INR 1,50,000 (increased from 1,00,000) towards deductions under section 80 C. While the generic principle remains true, however based on various cases, the applicable benefits vary significantly and we may end up having no deductions. The following key question raised by Alex helps to put these cases together and would assist us in taking the best decisions
1. I have bought an flat which is under construction, can I take the benefits of home loan ?
No, the benefits on the home loan can be taken only if the construction of the flat has been completed in the current financial year and the registration has been completed. This is something most people realize only after they have bought an under construction property. However, the tax laws allows you to cummulate the interest that you have paid over the last 3 years during which the flat was under construction and allow deduction of the same over the next five years. e.g If Alex paid an interest of INR 30,000 every year over the last 3 years of construction then he would have paid a total of INR 90,000. This amount can be divided over the next 5 years and cummulated with the current year interest payment. This would mean that Alex can include INR 18,000 (INR 90,000 divided over 5 years) along with the INR 30,000 of interest payment of the current year to take a total benefit of INR 48,000.
2. I have a flat in Delhi which I have taken using a home loan and I have been transferred to Mumbai recently. Currently I am living on rent in Mumbai. Can I take the home loan tax benefits pertaining to my flat in Delhi ? Can I also claim my HRA (house rent allowance) for the rent I pay in Mumbai ?
The answer is yes to both. With regard to home loan on your flat in Delhi, you can take the home loan tax benefits (only for one flat). This would be upto the maximum permissible INR 1,50,000 lacs per year on the interest payment. If you have rented out the flat to someone else, then you would need to include the income from rent as part of your total income. If you have rented out the flat and showing it as an income, then there is no limit to the tax benefits on the interest portion paid.
Apart from this since you are living in Mumbai and paying rent, you can also claim the HRA (house rent allowance) benefits on the rent maximizing your tax savings.
3. I have a flat in Mumbai, but I am not living in the flat instead have taken a rented property closer to my office in Mumbai, can I take the tax benefits on the home loan ? How will it impact the HRA benefits ?
With regard to tax calculation, the provision on HRA (house rent allowance) and those with regard to benefits on home loan is not linked to each other. This means that you may own a flat in Mumbai but you can live in another Flat for business reasons. Hence, with regard to home loan on your flat in Mumbai, you can take the home loan tax benefits (only for one flat). This would be upto the maximum permissible INR 1,50,000 lacs per year on the interest payment.
4. The interest that I pay on home loan is more than INR 2,50,000. Can I claim the entire amount?
No, the maximum permissible tax benefit that can be taken is INR 1,50,000.
5. The interest that I pay on home loan is more than INR 1,50,000. How can I maximize the tax benefits on the home loan?
You can maximize the benefits if the property is co-owned with your spouse or family member in which case both of you would be able to take the benefit of INR 1,50,000 limit. You would need to show that the property is co-owned and that both you and your co-applicant is paying towards the EMI in the ratio in which you would like to claim the benefits or you can make the payment to EMI through a joint account.
6. Can I claim the home loan tax benefits in case I have 2 properties ?
Yes deduction is permitted on both properties. In case you have two home loans for two separate house properties and if you are residing in one of the houses, then first House is considered self occupied. Hence you can take the home loan tax benefits on the first house. With regard to the home loan tax benefits on the second home, it will be considered as ‘deemed to be let out’ and the deemed rental value (if not rented out) or the actual rental value (if rented out) will be considered as income and taxable in the hands of the individual.
7. My HRA (house rent allowance) is currently INR 2,40,000 per annum (allowance of INR 20,000 per month). My friends and family tells me to buy a flat so that I can take tax benefits?
This is a very important question and a situation most people come across and would require a careful deliberation on the same. Under income tax norms, the provision on HRA and home loan tax benefits are not linked
Let us assume that Alex takes a home loan to buy a flat where the annual interest payment as part of EMI is INR 3,00,000 (a home loan of INR 35,00,000 and above would have annual interest payment of INR 3,00,000 or more).
- If Alex has purchased the flat in his name and is staying in the flat he purchased, then he cannot claim HRA (house rent allowance) and the maximum he can claim is INR 1,50,000. Hence instead of taking benefits on INR 2,40,000 as part of HRA, he is losing tax benefits of INR 90,000 and he can claim tax benefits of only INR 1,50,000. Hence from buying a house with the intention of taking tax benefits is not the right decision.
- If Alex had purchased the flat in his spouse name, then he could gain the benefits of HRA but would need show the rent as income in his spouse name. This would mean that the spouse would have to show the rent received as income and need to pay taxes as per the norms. Alex’s spouse would be able to take deductions as per the tax norms slabs. Assume Alex’s spouse in not working, and let us assume the rent that Alex pays to his spouse if INR 20,000 per month. Hence the spouse annual income is INR 2,40,000 which is within the minimum tax benchmark and hence wouldn’t need to pay tax. In this case there is no real tax benefit that Alex is gaining (albiet he tried to take buy the house in his spouse name) except that he is able to take the benefit of a HRA. If Alex spouse is working, then her total income including the rent can take the benefit of the 1,50,000 tax benefit on the interest paid. However, given that his spouse income is showing an additional income due to rent of INR 2,40,000, her net taxable income including the rent after deducting that tax benefits is higher and hence his spouse need to pay a higher tax.