Understanding tax benefits on home loans

Home loan is the biggest liability for most of us. It takes away anywhere between 25-50% of our income in EMI.

Fortunately, the government has provided some relief in the form of tax rebates. Let’s discuss the tax rebates, some scenarios, and the nitty-gritty of tax calculations for the current year.

Tax rebates and extent of tax deduction
Home loan payment has two components — principal and interest. Currently, there are tax rebates on both of them. Tax rebate is possible on Rs1.5 lakh of interest as per Section 24(b). The principal gets tax rebate on maximum of Rs1 lakh under Section 80C. Most of us claim PPF, PF, insurance, ELSS and a few more (as applicable) under 80C. If the total amount claimed is less than, we can add only that part of principal for tax rebate which caps the claim at Rs1 lakh. So, if X claims Rs70,000 under 80C with PF and insurance, X can only claim another Rs30,000 for the principal he pays on home loan.

There are a few conditions to be satisfied in order to claim this rebate:
1. The loan should have been taken after April 1, 1999.
2. The possession must be within three years of the year in which the loan was taken.
If any of the above conditions are not met, the claim is only Rs30,000.

Let’s discuss some scenarios and to see how much rebate is possible to make this clear.

Example 1: Loan and home in the same financial year
You took the loan and got the possession of home in the same financial year. Your loan profile is as follows (see Table 1):
Deduction under 80C (`100,000 limit): If you have Rs60,000 claimable deductions under 80C from PF, PPF, ELSS and insurance, you can claim maximum of Rs40,000 of your principal.
Deduction under 24(b): You can claim maximum of Rs150,000. Hence you will only claim Rs150,000 out of Rs240,000 of interest paid.

Example 2: Loan now, home later
You took the loan and got the possession of home after 1 financial year. Your loan profile is as follows (see Table 2):
In the pre-possession period, you can claim tax rebate on principal only under 80C. Hence when you file taxes in March, 2011, you can claim Rs50,000 deduction under 80C (if it doesn’t exceed the total permissible amount of Rs1 lakh).

Once you take possession of the house, you can claim the rebate of pre-possession period in 5 equal instalment (in 5 years) subjected to the condition that the pre-possession claim and current year claim do not exceed Rs1.5 lakh under 24(b) and Rs1 lakh under 80C. Let’s do the math.

Deduction under 80C (Rs100,000 limit): You can claim principal of Rs50,000 for the current year and another Rs10,000 for the pre-possession year, i.e. Rs60,000 in total. If you have Rs50,000 claimable deductions under 80C from PF, PPF, ELSS, and insurance, you can claim maximum of `50,000 of your principal.

Deduction under 24(b): You can claim interest of Rs1,30,000 for the current year and another Rs26,000 of the pre-possession year, i.e. Rs1,56,000 subject to the condition of Rs1.5 lakh limit. Hence you maximum claimable amount is Rs1.5 lakh.

Example 3: Loan is in my name but homeowner is someone else
You can get a home loan for a relative. If the home is in your relative’s name, you cannot claim the tax benefit even if you pay the EMI. However, to avail the tax benefit, you can sign yourself as co-owner of the property.

Example 4: Possess the home but it is given out on rent
This is a typical concern for many people who cannot live in their home because of personal or professional reasons and instead rent it out. They themselves live in a rented apartment. The benefits can be availed as follows:

You can still claim the tax benefit of Rs1.5 lakh on interest under 24(b) and on principal under 80C subject to a limit of Rs1 lakh.

You can claim HRA because you are living in rented apartment.

The rent you earn from your apartment will be taken as your income and taxed accordingly.

If you have not rented your apartment, it will still be taxed on a notional amount.

Example 5: Joint home loan
Going for a joint loan will help you save more tax. Remember that the limit of Rs1.5 lakh on interest and Rs1 lakh on principal under section 80C is applicable to individuals.

Let’s take an example (see Table 3). Assume that you both have about Rs50,000 claimable under 80C in the form of PF and insurance. Now, let’s see how much you can claim under tax rebate. Each one of you can claim Rs1,50,000 on interest under section 24(b). This means you can claim Rs3,00,000 on interest collectively. Similarly, since you already have Rs50,000 under 80C, you both individually can claim another `50,000 from your principal payment which is Rs70,000 in your case. This means you can further claim Rs1,00,000 on principal under 80C.

 Adhil Shetty is the CEO of BankBazaar.com