The government wants you to own a house and the same becomes evident from the various tax benefits allowed under the income tax laws to the persons who own a house. Let us understand the various beneficial tax provisions which prove that the government wants you to own a house.
- Tax benefits for repayment of home loan:
As per [Section 80C] of the Income Tax Act, 1961, an individual and a Hindu Undivided Family are entitled to claim deduction upto Rs. 1.50 lakhs in respect of principal repayment of the home loan, taken for the purchase or construction of a residential house. The loan should have been taken from specified institutions like bank, housing finance company, central government, state government , local authority or even a public limited company which is your employer.
For claiming these benefits the house should be complete and possession should have been taken by you. So for an under construction house at the end of the year, you cannot claim this benefit.
The government wants you to continue to own the house and not to speculate on it. This is evident from the provision which requires you to retain the house and not to sell it before completion of five years from the end of the year in which possession of the house is taken. In case you sell the house before completion of five years no tax benefits shall be available for the year in which you sell the house. Moreover all the tax benefits claimed earlier by you on such house shall be reversed in the year in which you sell the house and it shall be treated as income of the year. There is no such reversal provision in case you prepay the home loan even before completion of five years. So the government does not mind you prepaying the home loan but does not want you to trade in the house.
- Tax benefits for payment of the amount owed towards cost of the house:
Section 80C also allows you deduction within the overall limit of Rs. 1.50 lakhs in respect of payment of instalment or part payment of the amount due to any company or cooperative society where you are a shareholder or a member for amount outstanding in respect to cost of the house allotted to you by such company or cooperative society. Deduction is also available for payment of amounts due to any housing board, or any development authority towards purchase consideration for such house purchased under any scheme of these authorities for construction or purchase of a house.
- Tax benefits for payment of stamp duty etc
It is not only the principal repayment of the loan which is allowed under section 80C, even any amount paid by you towards stamp duty, registration charges or transfer charges are also eligible for the tax benefits. The deduction in respect of these amounts is available only if the possession of the house is taken during the year. So even if you take possession of the house on 31st March of the year, you can claim the tax benefits of under Section 80C for home loan repayment, cost payment as well as stamp duty and registration charges.
- Tax Benefits for interest payment in respect of completed house
Under [Section 24(b)] of the income tax act, you are allowed deductions for interest paid on money borrowed for purchase, construction or even repair, renovation of the house. This deduction is available from the year in which the construction of the house is completed and possession taken in case of an under construction property. The quantum of deduction will depend on whether the house is self occupied or let out. In case of let out property full interest is allowed to be deducted. However in case of self occupied house property the amount of deduction shall be restricted to Rs. 2 lakhs generally. However in case of an under construction house if the construction is not completed within a period of three years from the end of the year in which the amount of the loan was disbursed, the quantum of deduction shall stand restricted to Rs. 30,000/- in a year. Looking at the usual delay in completion of the construction of the house in the country and in order to give relief to the taxpayers the government, in the Budget of 2016, has extended the period of completion of the construction of the house from three years to five year.
For claiming interest deduction it is not necessary that the loan has to be taken from specified institutions as is required for claiming deduction for loan repayment. Even interest paid to friends and relatives also qualify for this deduction as long as you are able to establish the linkage between the money borrowed and its end usage for the house purposes.
Since the deduction is available from the year in which the construction of the house is completed and possession is taken a question may arise as to what happens to the interest paid before completion of the construction. The law has provided for it. You can claim such interest, which is generally referred to as Pre EMI interest, in five equal instalments from the year in which construction of the house is completed. The overall deduction is restricted to Rs. 2 lakhs in case the house property is self occupied. Here also the law requires you to continue to own the house for at least for five years failing which the claim for Pre EMI interest not claimed shall lapse for the remaining years.
- Latest changes in the Budget-2016 for affordable house
In the last budget the finance minister had allowed deduction of Rs. 50,000/- in respect of interest on loan taken to buy an affordable residential house. Section 80 EE which is substituted provides an additional deduction for interest of Rs. 50,000/- in respect of loan of an amount not over Rs. 35 lacs for a house costing not more than 50 lakhs. This deduction is available only for the loans taken from financial institution or housing finance company. The benefit is available only to the people who do not own any house on the date of sanction of the home loan. This also goes to prove that the government wants each and every one to own a roof over his head. It is interesting to note that completion of construction is not a precondition for claiming this deduction.
- Capital Gains Exemption:
[Section 54] and [Section 54F] of the Income Tax Act, provide for exemption for long term capital gains if a house is purchased or constructed within specified period. In case the capital gains arise from a residential house held for more than three years, you are required to invest only the capital gains computed after taking into account the indexation benefits. In case the long term capital gains arise on sale of any asset other than a residential house property, you are required to invest the net sale consideration for purchase of a residential house property provided you do not own more than one residential house on the date of sale of such other asset.
From the above discussion it becomes amply clear that the government wants you to own a house and continue to own it and therefore it has provided many benefits under the income tax laws. There are other benefits under the banking and indirect tax area which also point towards government’s eagerness to ensure that every citizen has a roof over its head. This I intend to cover in my [next article].
[Read More Post by Balwant Jain] [NON INCOME TAX BENEFITS TO OWN A HOUSE]
(The author is a CA, CS and CFP. He can be reached at jainbalwant at gmail.com and @jainbalwant)