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Tax benefits

This section helps you to know more about the tax benefits that can be availed on investment in residential property.

What are the tax benefits that a home loan applicant can avail?

A. Tax Deduction towards principal repayment:

The maximum limit of repayment of housing loan qualifying for deduction under Section 80C of the Income Tax Act is Rs.1,50,000/- (including Stamp Duty, Registration Fee incurred for the purpose of transfer of such residential house property).

This tax deduction under Section 80C is available on payment basis irrespective of the year for which the payment has been made, provided that the assesse does not transfer the house property on which he has claimed tax deduction under Section 80C, before the expiry of 5 years from the end of the Financial Year in which the possession has been obtained by him.

B. Tax benefits on the Interest component of home loan:

  1. The interest component in the EMI towards the Home loan can be claimed as deduction from "income from house and property" under Section 24 of the Income Tax Act.
  2. Section 24 states that the maximum tax deduction allowed under Section 24 is Rs. 2 lakh in case of self-occupied property or one that is constructed out of borrowed funds. If the property is not self-occupied i.e. it is rented out, there is no maximum limit- the entire interest amount is allowed as deduction.
  3. The interest payments for the year shall be considered as loss under the head "income from house property". These losses can be adjusted in that same year against other heads of income including salary.
  4. In case of self-occupied property, the interest benefit drops to Rs.30,000, if the property is not constructed within 3 years from loan initiation. This limit of 3 years has been increased to 5 years from Financial Year 2016-17 onwards.
  5. The interest on borrowed funds in pre-construction period can be claimed from the year when the construction is completed in equal installments over a span of 5 years.
  6. For First Time Buyers, an additional deduction of Rs.50,000 for Interest on Home Loan is available under Section 80EE, which is over and above the tax deduction of Rs. 2, 00,000 under Section 24 and Rs.1,50,000 under Section 80C.

The conditions for the 80EE deduction are as follows:

  1. This deduction would be allowed, only if the value of the property purchased is less than Rs. 50 Lakhs and the value of loan taken is less than Rs.35 Lakhs.
  2. The loan should be sanctioned between 1st April, 2016 and 31st March, 2017.
  3. The benefit of this deduction would be available,till the time the repayment of the loan continues.
  4. This Deduction would be available from the Financial Year 2016-17 and onwards.
How does reinvestment in a residential house lead to exemption from Long Term Capital Gains Tax?

Sections 54 (Long-term Capital Gain on sale of a House Property) and 54F (Long-term Capital Gain on sale of any asset other than a House Property) of the Income Tax Act, allows a taxpayer to obtain exemptions from the Long Term Capital Gains Tax, if he re-invests the gains in a residential property. The conditions are specified as below:

Common requirements between the two Sections:

  1. The capital gains must be utilized for the purchase or construction of a new residential house property to claim the exemption.
  2. The new property must only be bought on the name of the party in whose name the Long Term Capital Gains has accrued and not on anybody else's name.
  3. The new residential property must be purchased either 1 year before the sale or 2 years after the sale of the property/asset or the new residential house property must be constructed within 3 years of the sale of the property/asset.
  4. If you are not able to invest the specified amount in the manner stated above before the date of tax filing or 1 year from the date of sale, whichever is earlier, deposit the specified amount in a public sector bank (or other banks as per the Capital Gains Account Scheme, 1988).
  5. Only ONE house property can be purchased or constructed.
  6. Since the FY 2014-15, it is mandatory that new residential property must be situated in India. The exemption shall not be available for properties bought or constructed outside India to claim this exemption.

Differences between these two Sections:

Section 54 Section 54F
To claim full exemption, the entire capital gains have to be invested. To claim full exemption, the entire sale receipts have to be invested.
In case entire capital gains are not invested, the amount not invested is charged to tax as long-term capital gains. In case entire sale receipts are not invested, the exemption is allowed proportionately. [Exemption = Cost of the new house x Capital Gains/Sale Receipts] You should not own more than one residential house at the time of sale of the original asset.
This exemption will be reversed, if you sell this new property within 3 years of purchase and capital gains from sale of the new property will be taxed as short-termcapital gains. This exemption will be reversed, if you sell this new property within 3 years of its purchase or construction OR if you purchase another residential house within 2 years of the sale of the original asset or construct a residential house, other than the new house within 3 years of the sale of the original asset. Capital gains from the sale will be taxed as long-term capital gains.

If the cost of the new residential property is lower than the total sale amount, then the exemption is allowed proportionately. For the remaining amount, you can reinvest the money under Section 54EC within 6 months.

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