It is common knowledge that availing a home loan attracts several tax benefits under the Income Tax Act, 1961. Borrowers servicing home loan EMI can enjoy exemptions on their taxable income by way of both the interest and principal repayment amounts.
These home loan tax benefit are available under Section 80C, Section 24(b) and Section 80EE of the ITA.
Mentioned below, however, are some of the lesser-known facts about home loan tax incentives.
Tax benefit can be claimed on paid interest after missing an EMI
Deduction on home loan interest is made on an accrual basis, unlike principal repayment of home loan, which is done on a ‘paid’ basis. This means one is eligible to claim tax benefit on the EMI’s interest part for an entire year even after missing a few EMI’s. The documents related to the deduction should be retained to substantiate if interrogated by tax authorities.
Processing fee qualifies for a tax deduction
It is unknown to most borrowers that the charges related to a housing loan qualify for a tax deduction. Legally, since these charges are referred to as interest, a deduction on them can be claimed. In addition to this, a tribunal judgement exists, which states that the processing fee is related to the bank services in connection to the loan granted and therefore, it comes under service fee.
Reversal of principal repayment tax benefit occurs if the property is sold before 5 years
One scores negative tax points if a house is sold within five years, either from the purchase date or from the date of availing a housing loan. According to rules, the deduction claimed under Section 80C regarding the principal repayment of home loan would be reversed and added to the year’s annual taxable income when the property is sold. The individual would be taxed at existing rates for the same.
A tax deduction is applicable on loans from relatives and friends
According to Section 24, a deduction can be claimed for repaying interest on loans acquired for construction or purchase of a property. It can also be claimed for the amount borrowed from individuals for property repair and reconstruction purposes. An income tax return stating the interest income must be filed. The charged interest should be reasonable, and its legal certificate should be provided.
A co-borrower may not be eligible for a tax break
A tax break cannot be claimed on a home loan even though one is paying the EMI. In order to claim benefits, one needs to be both a borrower and an owner. One is ineligible even if one of these titles is missing. For instance, if an individual is paying EMIs for a property owned by his/her parents, the former cannot claim tax breaks for the property unless he/she co-owns it.
Prospective borrowers should be responsible regarding home loan repayments. In that way, apart from enjoying the home loan tax benefit, they also become eligible to enjoy additional perks like lowered interest rates.
Additionally, before opting for a loan, they should look for pre-approved offers to streamline the loan application process. These offers are extended on various financial products like home loans, loan against property and more. One can check the pre-approved offer by providing a few details, such as one’s name and contact number.
While there are numerous benefits of home loans if one is willing to buy a house, one needs to be aware of the above-mentioned tax incentives before opting for one. This will help them to optimise their borrowing experience.
