Tax Deductions on House Property

Deductions that you can claim on purchase of house property

You can get a deduction of home loan interest repayment under section 24 of the Income Tax Act and a deduction of the principal amount under section 80C. Both these deductions can be claimed for houses of which the construction is completed. Processing fees paid at the time of loan sanctioning can also be claimed as interest repayment under section 24. Apart from this you may also claim the amount of money that you paid for stamp duty, registration fee and other expenses in the process of transferring the property in your name under section 80C. This deduction can however be claimed in the year of purchase itself. You need not wait till the construction of the house property is complete to claim this deduction. E.g., if you have purchased a house in April 2016 and paid Rs. 1,00,000 as stamp duty and registration charges then you can claim these expenses as a deduction u/s 80C for the FY 2016-17. The amounts paid as interest repayments and processing fees paid will accumulate and can be claimed as a deduction from the year in which the construction gets completed. Principal repayments made before the construction of the house is completed cannot be claimed later and will lapse.

Home loan interest payment deduction under section 24

When you take a housing loan you need to pay a huge amount as interest on home loan. This interest repayment component is eligible for a deduction from your taxable income. You can claim this deduction for an owned house property. The deduction amount for self-occupied house property is Rs. 2,00,000 and can be either claimed by a single owner or joint owners up to Rs. 2,00,000 each. In case you have rented out your house property then you can get an unlimited deduction without any limit of Rs. 2,00,000. E.g. Nitish takes a home loan of Rs. 35,00,000 and the annual interest repayment @10.25% goes up to Rs. 2,32,000.Nitish can claim an interest deduction of Rs. 2,00,000 if the house is self-occupied and the entire amount of Rs. 2,32,000 if the property is let out (applicabel for 2nd house property). However if Nitish has booked a house property under construction then the deduction limit will be Rs. 2,00,000 only if the construction gets completed in 3 years else the deduction can be claimed only up to Rs. 30,000. Suppose Nitish books the house in the year September 2015 and the construction of the house property gets completed in the year December 2019 then the period of 3 years has already lapsed and now he can claim interest amount of only Rs. 30,000 as a deduction.

Deduction for pre EMI interest payment on home loans under section 24

You can claim this interest as a deduction in your return of income from the year in which the construction of your house property gets completed. Often we book a house when it is still under construction in order to get benefit of a lower property rate. This often leads to the bank loan being sanctioned at the time of entering into an agreement of sale with the builder. The bank then starts part disbursements of loan amounts to the builder as the construction work progresses. Once the bank starts disbursing part loan amounts it starts to charge an interest to you and hence interest becomes payable by you. Generally you can claim interest deductions from your income only after the construction of the house gets completed. However the Income Tax Act has a provision to claim the accumulated pre-construction period interest as a deduction in five equal installments over a period of 5 years starting from the year in which the construction is completed. E.g. If Anna books a house under construction in June 2014 and gets a home loan of Rs. 20,00,000 sanctioned from a bank. Suppose she has to pay an interest totaling to Rs. 2,00,000 till the year she gets possession of her house in May 2016, then she can claim this entire sum of Rs. 2,00,000 from the FY 2016-17 onwards as Rs. 2,00,000/5 = Rs. 40,000 each year until FY 2020. This pre-EMI interest is a part of the total Rs. 2,00,000 deduction available for self-occupied house property.

Tax implication of sale of house property

If you sell your house property you might be liable for capital gains tax on the amount of profits you earn on the sale. Apart from this if you sell your house within 5 years of purchase then the tax benefit claimed under section 80C for principal repayment will be reversed and added to the income of the year when the sale takes place. This is because the deduction for principal repayment is available only on the premise that the house will not be sold within 5 years from date of purchase. E.g., suppose Meeta bought a house in January 2013 and wishes to sell it in January 2017, the total period of holding the house is only 4 years. If Meeta has claimed a total of Rs. 2,00,000 as principal repayment deduction from her taxable income for the last 4 years then this amount will be added to her income for FY 2016-17. Hence the income for this year will increase by Rs. 2,00,000 even when Meeta has not earned it and tax liability will also be higher.

One should therefore be very careful while making decisions for sale of property and take into account the tax implications in order to minimize taxes.
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