If you’re always worried about the fine print regarding Housing Loans and have many queries but not sure whom to ask, then this is just for you. Mrs. Pradita Nambiar, an MBA in Financial Management and a certified Equity Research Analyst, helps us in understanding the Housing Loan by demystifying all the minute details that you always wanted to know.
1. What are the income tax benefits available to me when I take a housing loan?
If you own a single house which is treated as self occupied, then you are eligible for:-
(a) Deduction of Interest u/s 24 on loan taken restricted to a maximum of Rs.1,50,000/-.
(b) Deductions of Principal u/s 80C restricted to Rs.1,00,000. (This limit also includes contributions to DSOP, AGIS, LIC etc., )
If you own more than one property.
(a) There is no restriction on deduction of interest u/s 24 which means that the actual interest paid during the relevant financial year can be claimed, even if it exceeds Rs.1,50,000/-.
(b) No deductions are available under sec 80C
2. Can I get a housing loan for purchasing land? Will I get the tax benefits as in a housing loan?
Yes, you can. No tax benefits are available for purchase of land. However, if you take a loan for construction on that land, then the tax benefits are applicable on the combined loan for the land and the construction of the house. The tax deductions will be applicable from the year the house construction is complete.
3. If I have two housing loans for two different properties, which one should I treat as self occupied?
Logically, it is advisable to show the property, where the annual interest being paid on the housing loan is less than 1.5 lakhs as self-occupied. The second housing loan where the annual interest exceeds1.5 lakhs could be shown as property having been let out. This way, you will be able to utilize the provisions available under sec 24 optimally. It is also important to remember that the interest component of a housing loan is higher in the initial years, while the principal component increases towards the latter half of your loan period. Either way, most defence officers are rarely able to utilize the principal component of the housing loan since it is clubbed with other contributions for eligibility under sec 80(c) above.
4. How do I calculate Annual Value of my house property?
(a) In the case of self-occupied property, the annual value is taken as nil.
(b) Where the property is given on rent, the annual value will be calculated based on the rent received.
(c) Where the property is lying vacant and has not been rented out or self-occupied, notional rent is calculated.
5. What is notional rent?
In cases described in 4(c) above, a notional rent calculated based on the rent prevailing in the neighbourhood is considered as the annual value of the house.
6. If the property is located in a city different from where I work, can I treat the house as self occupied and therefore take the annual value as nil?
Yes, even though the house is not occupied by you for self residence and you stay in a rented premises in another city.
7. If I live in rented premises and If my own house is located in the same city as the rented premises, can I treat it as self occupied?
Yes, Income Tax rules recognize the fact that more than one house can be occupied and used by the assessee at the same time for the purposes of his own residence.
8. If I borrow for renovation of a house, how much benefit do I get on Income Tax?
Only Rs.30, 000 is allowed in respect of self occupied property.
9. How do I calculate income from House property?
The Income from house property is calculated as follows:-
(a) Rental Income- municipal taxes=Annual Value(A)
(b) 30% of Annual Value as Standard Deduction(S)
(c) Interest payable on loan=I
(d) Income from House Property(H)=A-S-I
10. Can Income from house property be negative?
Yes, Income from House property can be negative, in other words a loss. When rent received from house property is less than the interest paid on the loan as per calculation in point 9 then the income from house property is a loss or in other words negative.
- Rental Income – Municipal taxes = Annual Value = Rs.78,000/- (Rs.7.000/- p.m. rent, Municipal Taxes – Rs.6,000/-)
- Standard deduction (30% of annual value)=Rs. 23,400/-
- Interest payable on loan = Rs. 1,75,000/-
- Income from House Property= Rs. 78,000 – Rs. 23,400 – Rs, 1,75,000 = Rs. 1,20,400/- (This is the loss due to house property which is negative)
This amount being negative is deducted from your income from salary thus reducing your taxable income. If it was positive, it would get added to your salary income and therefore increase your taxable income and thereby increase your tax liability.
11. If you happen to be a salaried employee claiming House Rent Allowance (HRA) from your employer, are you eligible for an Income Tax exemption under Section 10(13A) of the Income Tax Act?
Yes. Minimum of the following three is eligible for HRA exemption:-
(a) Actual house rent allowance received from your employer
(b) Actual house rent paid by you minus 10% of your basic salary
(c) 50% of your basic salary if you live in a metro (Delhi, Mumbai, Kolkata or Chennai or 40% of your basic salary if you live in a non-metro.
12. How do I claim HRA exemption? What documents need to be submitted to claim exemption?
HRA exemption is claimed by submitting 4 or 5 rent receipts to the employer along with any other undertakings required by the employer. The employer on receipt of these documents exempts the HRA component from tax.
13. Can I claim Income Tax benefit even when I am receiving HRA?
Claiming HRA exemption has no bearing on the housing loan. Also, there are no conditions that restrict the availability of deduction of interest based on the assessee’s stay in any other premises. Deduction u/s 80C is also not affected by HRA exemption at all.
14. I have not claimed HRA exemption from the employer, what should I do?
If you have not provided your employer with information about the rent so that he can credit you with the eligible amount of relief before deducting tax at source then you can also claim such exemption when filing your tax return and seek a refund.
15. How do I avoid paying tax on the gains made on the sale of a house?
If you buy or build a residential home one year prior to the sale of your home, or within 2 years after the sale of your home, then the amount you have spent on the new home is exempt from tax. Similarly, if you buy a plot of land, and build a house on it, then both the cost of the plot and of developing the land are exempt from tax, as long as they fall within the stipulated 3 year period of 1 year prior and up to 2 years after the sale. Just remember that you should not sell the new house within a period of 3 years from its purchase, else the exemption will no longer apply.
Text by: Mrs. Pradita Nambiar.