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Let us discuss why one need to take a housing loan and what are tax benefits associated to it.

What tax benefits one can avail on a home loan?

Resident Indians are eligible for certain tax benefits on both the principal and interest components of the home loan as per the Income Tax Act, 1961. These deductions are available to assessees, who have taken a loan to either buy or build a house, under Section 24(b).

(A) Interest on borrowed capital is deductible as follows:

1. If the following conditions are satisfied, interest on borrowed capital is deductible up to Rs 150,000.

* Capital is borrowed on or after April 1, 1999 for acquiring or constructing a property.
* The acquisition/construction should be completed within 3 years from the end of the financial year in which capital was borrowed.
* The person, extending the loan, certifies that such interest is payable in respect of the amount advanced for acquisition or construction of the house or as refinance of the principle amount outstanding under an earlier loan taken for such acquisition or construction.

2. If the conditions stated above are not satisfied, then the interest on borrowed capital is deductible up to Rs 30,000. However, the following conditions have to be fulfilled:

* Capital is borrowed before April 1, 1999 for purchase, construction, reconstruction repairs or renewal of a house property.
* Capital should be borrowed on or after April 1, 1999 for reconstruction, repairs or renewals of a house property.
* If the capital is borrowed on or after April 1, 1999, but construction is not completed within 3 years from the end of the year, in which capital is borrowed.

(B) In addition to the above, principal repayment of the loan/capital borrowed is eligible for a deduction of up to Rs 100,000 under Section 80C from assessment year 2006-07.

Are you taking home loan only to get tax benefit?

Repayment of home loan consist of principal repayment and interest payment, and on that interest payment(which is effectively a loss) one gets the tax benefit. Let’s understand this by an example

A’s monthly gross salary is 60,000 and take home salary is 40,000. A has taken a home loan for which he has to pay an EMI of 10,000.
Considering that he is in the early stage of loan, he will be paying most of his EMI towards the interest (see how). Let’s say that 8,000 is going to be payed towards the interest and 2000 towards the principal, A should to be worried about the interest payment because the princiapl repayment is for building an asset (home). So if A’s is paying 8,000 as an interest the maximum tax benefit A can get is 2,400 (30%). Now the take home salary is 34,400 (40,000 – 8,000(interest payment) + 2,400(tzx benefit)). Here we haven’t subtracted 2,000, because that is considered as a savings(investment for an asset).

Hence home loan has given a tax benefit of 2,400, the take home salary has reduced by 5,600 (40,000 – 34,400). So if you have enough money to buy/build a house, why to take a home loan.

What are the tax implications if a person buys a house with a loan and sells it (a) within the same year, (b) after three years? Further, what is the impact on benefits related to interest and capital repayment?

If a person buys a house and sells it within the same year/after 3 years, and if any profit is made, then a capital gains tax liability arises on the same.

Let us take an example to better understand the same. For example, if you purchase a house for Rs 500,000 by taking a loan and you sell it in the same year for Rs 700,000, then you make a profit of Rs 200,000. On this profit, you will be liable to pay short-term capital gains tax since the sale took place in the same year. But, if the sale had taken place after 3 years, then a long-term capital gains tax liability would have arisen.

The long-term capital gains will be exempt from tax if the profit amount (after factoring in the indexation benefits) is invested in capital gains tax saving bonds or in a house property as specified under Section 54.

Under what circumstances can the tax benefit for taking a home loan towards purchase of a property be denied?

If it is proved that the home loan is simply an arrangement between the loan-seeker and the builder or with a third party for the purpose of claiming tax benefits, then tax benefits will not be allowed and benefits, previously claimed, will be clubbed to the income and taxed accordingly.

How to take the tax benefit on a joint loan?

Let us take an example to better understand the same. For example, a couple has taken a joint housing loan for buying a residential flat, registered jointly in couple’s name. The bank has given a certificate confirming that the total amount of EMIs during 1.4.2007 to 31.3.2008 is Rs 1,03,220 —Rs 73,220 from one spouse account and Rs 30,000 from other spouse account.

Under section 24(b), the phrase used is “the amount of any interest payable”, therefore, presuming that both the owners have 50% ownership in the property as well as the housing loan, a position may be taken that both are liable to “pay” equal sum of money as EMI, even though one has paid a lower amount, both are technically “liable to pay” equal amount. The balance amount that one has not paid, now owes to other. Hence, as per this position, both are eligible to claim interest deduction for equal amount. In any case, the total interest deduction cannot exceed Rs 103,220.

Good to know:

One can avail tax benefits on the housing loan if he/she is the owner/co-owner of the property.

There is no restriciton under the I-T Act which says that if one is getting tax benefit on a housing loan, one can’t take the HRA tax benefit.