Who is eligible for the tax deduction?
A person who buys a new house for resale or letting can claim exemption from mortgage tax under Sections 80C and 80EEA of the Income Tax Act 1961. If you are a co-owner or co-borrower, you can also claim tax benefits.
Maximum tax deductible amount for a home loan
- Up to Rs 1.5 lakh u/s 80C
- Up to Rs 1.5 lakh u/s 80EEA for early buyers
- Up to Rs 2 Lakh u/s 24 for a detached house; no limit for the non-independent house.
Interest on a home loan is deductible
For the purchase or construction of a home, a mortgage is mandatory. If the loan is for the construction of a residence, it must be completed within five years of the end of the fiscal year in which the loan was obtained. Interest payment and principal repayment are two parts of your EMI for a home loan.
Section 24 allows you to deduct the relevant part of your paid EMI for the year from your total income up to a maximum of Rs 2 lakh.
The maximum deduction for interest paid on a self-contained residential property is Rs 2 lakh from the 2018-19 valuation year.
Interest paid on a home loan during the pre-construction period is deductible.
Let’s understand this!
- Suppose you have purchased a property that is still under construction and has not yet moved in.
- You, on the other hand, pay for the EMIs.
- In this situation, your ability to deduct interest on a home loan does not begin until after construction is complete, or immediately if you purchase a fully constructed property.
So, does that mean you won’t get any tax benefit on the interest paid between the loan taken out and the construction work being completed?
Pre-construction interest, as defined by the Income Tax Act, is a type of interest that can be deducted. In addition to the deduction that you can otherwise claim on the income from your property, you can benefit from a deduction in five equal installments from the year of acquisition of the property or the end of construction. The highest amount that can be borrowed is still Rs 2 lakh.
Tax deduction on repayment of principal
Section 80C allows you to deduct the principal portion of your EMI payments for the year. The amount that can be claimed is limited to Rs 1.5 lakh.
To note – The property of the house must not be sold within five years of its possession to benefit from this deduction. Otherwise, the prior deduction will be deducted from your income in the year of the sale.
Stamp duty and registration duty
Additionally, stamp duty and registration fees are also deductible under Section 80C but only up to Rs 1.5 lakh in total.
To note – It can only be claimed in the year in which the expenses were incurred.