article 80C | Mortgage loan: tax benefit section 80C not available on this type of mortgage

Many of us borrow, that is, take out a private loan, from our relatives and friends to help us through difficult times. Some even take out private home loans instead of going to financial institutions like banks, NBFCs, and housing finance companies.

However, did you know that unlike a home loan contracted with a financial institution where you can benefit from tax advantages, those who take out private loans cannot benefit from all the tax advantages.

Taxpayers are permitted to claim a deduction from the principal repayment of a mortgage under Section 80C of the Income Tax Act 1961, but it is important to note here that the principal component of the private loans (loans from friends and relatives) are not included. under section 80C.

A deduction of Rs 1.5 lakh can be claimed under section 80C for the repayment of the principal of a mortgage taken out for the purchase or construction of a new house only. This limit includes all investments and expenses eligible for deductions under Article 80C, such as the Public Provident Fund (PPF), the Employee Provident Fund (EPF), the Equity Savings Plan (ELSS ), etc.

If a taxpayer wishes to claim a deduction for the main component of the home loan, he must ensure that the loan must be provided by certain entities / persons under 80C (2) (xviii) (c). That is, real estate loans must be obtained from a bank (private / public), a cooperative bank, the National Housing Bank or other notified agreements, i.e. say housing finance companies such as LIC Housing Finance Limited etc. the individual’s employer when that employer is public. Enterprise / Public Sector Enterprise / University / Cooperative Society or any central or state government) to be entitled to a deduction under Article 80C.

Therefore, the principal repayment of a home loan taken from friends or relatives or an unsuspecting money lender cannot be claimed as a deduction in the section. In addition, the additional benefit of Rs 50,000 under section 80 EE and Rs 1.5 lakh under section 80EEA will not be available. However, interest paid on the private loan is acceptable as a section 24 deduction. Thus, you can claim a maximum deduction of Rs 2 lakh for interest paid on a home loan taken out from friends, parents.

Let’s understand this with an example: Suppose Mr. Sanjay bought a house worth Rs 20 lakh. For this, he took out a loan from his friend Mr Vasanth. The loan is repayable in 20 equal installments with an interest of Rs 5% per annum. It repays the principal of Rs 1 lakh and an interest of Rs 1 lakh for the fiscal year 2020-21.

Mr. Sanjay is entitled to a section 24 deduction for interest paid of Rs 1 lakh even if the home loan is taken out from his friend. But he cannot benefit from a deduction under section 80C for the repayment of the principal made to Mr. Vasanth. Indeed, this deduction is not applicable for the repayment of the loan borrowed from friends.

In addition, if there is a legal written contract between friends and relatives for the mortgage taken out, even then the deduction of 80 C for the principal amount is not applicable. However, the contract between the Insured and the Bank for the mortgage can be applied in the deduction for article 80C.

Co-owners and co-borrower? You won’t get tax relief if …

You are not eligible for tax relief simply because you are a co-borrower because you must also be a co-owner. For example, if your parents own a house for which you pay the home loan EMIs, you also cannot claim tax breaks until you co-own the property.

You must be both a homeowner and a borrower to qualify for benefits.

Likewise, if you own a property with your spouse and your name is not on the loan agreement as a co-borrower, you also cannot claim deductions under the Income Tax Act.

(The author is the co-founder and managing director of SAG Infotech. SAG Infotech is a tax software development company that provides multiple IT solutions for tax returns to taxpayers and businesses.)