This article is written by Gautam Badlani, a student at Chanakya National Law University, Patna. This article examines the various tax benefits that can be claimed with respect to a home loan. The article thereby provides an overview of the relevant provisions of the Income Tax Act and analyses the landmark judicial pronouncements concerning them. It further analyses the benefits of the Pradhan Mantri Awas Yojana.

This article has been published by Sneha Mahawar.​​ 

Introduction 

A lot of people have dreams of having their own homes where they can enjoy life and enjoy life with their loved ones. However, buying a home is an expensive affair, particularly in today’s age of skyrocketing property and land costs. As a result, many people have to take out home loans from banks and other financial institutions. A home loan can be taken from a public or private bank, cooperative bank, friends and relatives, non-banking financial companies, housing finance companies, etc. 

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The government often encourages people to invest in homes and makes home loans easily accessible. The government also offers various tax benefits on home loans. This article explains the tax benefits that can be gained from home loans and explains the legal provisions that deal with home loans. The article also deals with some landmark judicial pronouncements concerning the tax benefits of home loans.  

What is a home loan

A home loan is defined as a secured loan that is provided by banks and financial institutions. This loan is availed to purchase a property, and such property is pledged as collateral. A home loan is provided for a long period and is repaid in Equated Monthly Instalments (EMIs). 

A home loan consists of the principal amount, which is borrowed from the financial institutions, and the interest that is to be paid on the principal amount. The tax benefits are provided on the principal amount as well as the interest that is paid on the principal amount. 

A tax deduction is the most common type of tax benefit that is available on home loans. There are numerous provisions in the Income Tax Act, 1961, which allow for the deduction of the interest payable on a home loan from the total income of an individual. 

Pradhan Mantri Awas Yojana

This mission was launched in 2015 and aimed to provide housing for all by 2022. Subsequently, the government decided to continue the scheme until 2024. 

In view of this mission, the government took several steps to make home loans accessible and affordable. The government offers subsidised home loans under this scheme. The rate of interest payable on the loans availed under this scheme is 6.5% per annum, and the loan can be availed for a maximum period of 20 years. 

Section 24(b) of the Income Tax Act, 1961

Section 24(b) of the  Income Tax Act, 1961, provides that where a housing property has been purchased, reconstructed, prepared, renewed, or constructed using funds from borrowed capital, in such a scenario, the interest payable on the borrowed funds can be claimed as a deduction while computing the total income.

If the owner of the property or his family resides in the property, then the maximum deduction that can be claimed under the Section is Rs 2 lakhs. In case a person has two homes, then the deduction claimed in respect of the two houses combined should not exceed Rs 2 lakh. 

However, where the property is being rented, then the entire interest can be waived as a deduction. 

Abeezar Faizullabhoy v. CIT (2021)

In the case of Abeezar Faizullabhoy v. CIT (2021), the assessee claimed a deduction of interest that he had paid on the borrowed capital of Rs 2 lakhs. He had borrowed the amount to purchase a residential property. However, he had not taken possession of the concerned property, and hence, his deduction under Section 24(b) was refused. The assessee then challenged the assessment before the Commissioner of Income Tax (CIT), but the Commissioner upheld the decision of the assessing authority. The CIT was of the view that since the assessee had not taken possession of the property, he could not derive any income from the same, and hence no deduction could be claimed under the heading ‘income from house property’. 

Thereafter, the assessee filed an appeal before the Income Tax Appellate Tribunal. 

The Tribunal was of the opinion that Section 24(b) does not contemplate any pre-condition that the assessee should have taken possession of the concerned residential property in order to claim the tax benefit. The two provisions of the Section only prescribe an upper limit on the benefits that can be claimed under the said provision and do not otherwise affect the right of the assessee to claim tax benefits. Thus, the Tribunal allowed the appeal filed by the assessee and approved the deduction claimed by him with respect to the interest paid on the home loan taken by him.  

Section 80EE of Income Tax Act, 1961

Section 80EE provides that, while calculating the taxable income of any assessee, the interest payable by the concerned assessee on a loan taken for the purpose of any residential property from any financial institution shall be deducted.

Such a deduction is only applicable for the assessment years beginning 1st April, 2022. The maximum permissible deduction is Rs 50,000. It is pertinent to note that the benefits available under this Section are available only to individuals and cannot be claimed by companies, Hindu Undivided Family or any other type of taxpayer. However, since the Section does not provide that this benefit can be claimed only by residents of India, it can be implied that even non-residents can claim the benefit under this Section. 

Moreover, it is not necessary for the beneficiary to stay in the concerned residential property for the purpose of availing the benefit under the Section. 

Sub-section 3 of Section 80EE provides the conditions that need to be fulfilled in order to claim the benefit under the Section. The prerequisites are:

  • The value of the residential property should be below or equal to 50 lakh rupees. 
  • The amount of home loan sanctioned should be below or equal to 35 lakh rupees.
  • The beneficiary should not own any other property on the date of availing the loan. 
  • This benefit can be claimed only in respect of such loans which are sanctioned between the period 1st April, 2016 and 31st March, 2017. 

This provision was earlier introduced in the financial year 2013-2014 and was only applicable to the financial years 2013-14 and 2014-15. Thereafter, this provision was reintroduced with applicability beginning with the financial year 2017-18. 

Section 80 EEA of Income Tax Act, 1961

Under Section 80 EEA, first-time home buyers can avail of an income tax exemption of up to Rs 1.5 lakh. The benefit of this provision could earlier be claimed only with respect to a home loan that had been applied between 1st April 2019 to 31st March 2021. However, subsequently, this benefit was extended to home loans applied till 31st March, 2022. 

Thus, if the home buyers fulfill the requirements provided under Section 80 EEA, they can claim a total benefit of up to Rs 3,50,000 under Section 24 and 80 EEA.

Section 80C of the Income Tax Act, 1961

The benefit under Section 80C can be claimed with regard to the home loan taken for a self-occupied residential property. Where the repayment of the loan is to be made in monthly installments or part payments, the principal amount paid back through EMIs can be claimed as a deduction under the Section. 

It is pertinent to note here that the tax benefits under this Section can be claimed only when the construction or repair of the house is completed. The benefits cannot be claimed with respect to a partially completed house. The completion certificate has to be obtained in order to claim the benefits under Section 80C. 

The deduction can also be claimed with respect to the stamp charges and registration fees paid on the concerned residential property. However, this deduction would also be subject to the maximum limit of Rs. 1.5 lakh. The 1.5 lakh limit includes all the expenditures which qualify as a deduction under Section 80C such as Employees Provident Fund, Public Provident Fund, etc. 

Tax benefits on second home loan

A second home can also be treated as a self-occupied property for the purpose of availing of the tax benefits provided under Sections 24 and 80C. However, the available deductions would be subject to the maximum ceiling prescribed by the concerned sections. 

A second home that is left empty or is occupied by the parents of the assessee will also fall under the category of a self-occupied home for the purpose of Section 80C. The tax deduction can be claimed in respect of installments paid on loans taken for both houses. The maximum deduction that can be claimed under this Section is Rs. 1.5 lakh. 

Essentials to claim tax benefits 

If you want to claim the aforementioned tax benefits, the following requirements should be fulfilled: 

  • The house should be registered in the name of the person who is claiming the tax benefits. If the house is jointly owned then the name of the beneficiary should be registered as a joint owner. 
  • The loan must be availed in the name of the owner of the concerned residential property. In case there are joint owners of the residential property and all the joint owners want to claim the tax benefits with respect to the home loan, then, in such a scenario, the loan must be taken jointly in the name of all the homeowners.  
  • A certificate must be obtained from the bank or any other financial institution from which the loan is taken specifying the principal amount of the loan and the interest payable thereon.

How to claim tax benefits on home loans

The very first step in claiming home loan tax benefits is to ensure that the concerned residential property is registered in the name of the beneficiary.

The second step is to calculate the tax benefit that can be claimed on the home loan. This saves time, and the beneficiary can approach the bank in case he needs help calculating the tax benefit. 

The loan sanction letter and the home loan interest certificate must be submitted to the employer of the beneficiary. The employer would adjust the TDS accordingly. 

Alternatively, the homeowner may claim the tax benefit on their income tax return. 

How to calculate tax benefits on home loan

The calculation of interest can be divided into two parts: first, where the property is under construction and the beneficiary does not have the position of the property, and second, where the property is self-occupied and the beneficiary position has the possession of the constructed property.

The interest paid at the pre-construction stage is added and can be claimed as a deduction in 5 equal installments in the 5 years subsequent to the financial year in which the construction of the property was completed. 

The interest paid after the construction is completed and the owner gets possession of the property can be claimed as a regular deduction in the financial year in which the interest is paid. 

However, the deduction would be subject to the Rs. 2 lakh cap prescribed by Section 24. However, if the property is given on rent and not self-occupied by the homeowner, then the entire interest can be claimed as a deduction, irrespective of the Rs. 2 lahks maximum limit. 

In the case of joint ownership, both joint owners can claim a deduction of up to Rs. 1.5 lakh under Section 80C. 

Conclusion

To have a home is a dream that everyone has. The government has taken several steps to make home loans accessible to the poor and has brought about several amendments to exempt the interest payable on these loans from the computation of income tax. Section 24(b) and Section 80EEA of the Income Tax Act provides for the deduction of the interest payable on the home loans, and Section 80C provides for the deduction of the principal repayment. Thus, deductions can be claimed in respect of both the principal amount of the home loan as well as the interest payable on the home loan.

Home loans can thus be regarded as a prudent investment if one knows the tax benefits that come with them. Moreover, one must be aware of the types of home loans that qualify for tax benefits.

Frequently Asked Questions (FAQs)

Can joint homeowners claim tax benefits under Sections 24(b) and 80C?

Where there are two or more joint homeowners, each of them can claim the tax benefits contemplated under Sections 24(b) and 80C. Both of them can claim a deduction of interest paid on the loan up to a maximum of Rs. 2 lakhs and a deduction of principal repayment up to a maximum of Rs. 1.5 lakh. However, it is necessary that the house be registered jointly in their names and that the loan be taken jointly by the concerned homeowners.  

What is a top-up home loan?

When the same lender offers a subsequent loan to the existing home loan customers, it is not a top-up home loan. A peculiar feature of the top-up home loan is that it is available at a much lower interest rate as compared to other loans. The tenures of top-up home loans are generally more flexible as compared to other types of loans.

The tax benefits contemplated under Sections 24(b) and 80C can also be claimed with respect to a top-up home loan.

Can tax deductions be claimed on home loan protection insurance?

Yes, the deduction stipulated under Section 80C can be claimed on the premium paid on home loan protection insurance. 

Can tax benefits be claimed on private home loans?

Private home loans refer to the capital that is borrowed from friends and relatives. Often these private loans help individuals in their difficult times. However, these loans are not covered within the scope of Section 80C for the purpose of availing the tax benefits. If the home loan is taken from any such lender who is not legally notified, then the tax benefits cannot be claimed with respect to such a home loan. Thus, a taxpayer cannot claim a deduction with respect to the repayment of the principal amount of a private home loan.

Under what conditions can the tax benefits be reversed?

The tax benefits can be reversed if the concerned residential property is sold within 5 years of getting possession of the property. The period of 5 years is calculated from the end of 5 years in which the possession of the property is taken by the concerned homeowner.

References

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