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Understand Tax Implications Rules of Home Purchasing

This page has described all the tax guidelines that one need to understand before buying a house property. It will introduce home buying and property taxes with all the necessary guidelines.

Section I: Tax deductions on home loans

Tax Deduction on Home Loan Interest: Section 24

A deduction of up to INR 2 lakhs can be claimed against home loan interest regardless of the fact if the owner is residing in that house or not. The entire interest of the home loan is eligible for deductions. 

But there are conditions defined for claiming this INR 2 lakhs rebate:

  • The loan must be taken for purchasing or constructing a new home property.
  • The loan sanction date should be on or after 1st April 1999.
  • The construction or purchase must be completed within 3 years from the end of FY in which the loan was sanctioned.

If your home loan does not satisfy any of the above conditions then you can claim a deduction only for INR 30,000. If any home loan is taken for reconstruction or repairs or renewal of house property, then also the eligible deduction will be INR 30,000. Such deduction can be claimed only in the starting of the financial year in which the property construction / purchasing is completed.

No deduction is allowed for loan taken before the construction of the property is complete

When the house is under construction, no deduction can be claimed against home loan. The time-period from taking the loan to completing the construction is called pre-construction period. Deductions can be claimed only after the construction get over. Interest paid during the pre-construction period can be claimed as a tax deduction in five equal installments once the construction gets completed.

Section 80C: Tax Deduction on Principal Repayment

Up to INR 1,50,000 can be claimed against principle repayment of the home loan which is specified in Section 80C. check the loan installment details to confirm the principle repayment amount. There are also conditions specified to be eligible for this deduction.

The conditions are:

  • The home loan must be taken for purchasing or constructing a new house property.
  • The property cannot be a sale within five years from the possession date. Selling property will add the claim back to your taxable income.

Stamp duty and registration charges and other related expenses are also eligible for deduction under Section 80C and the maximum deduction can be claimed is INR 1,50,000. This exempts can be claimed in the same year of the making these payments.

Section 80EE: Tax Deduction for First-Time House Owners

This is the recently added section of the Income Tax Act which provides a tax benefit of up to Rs.1,00,000 to the first-time homeowners. But this deduction can be claimed only if few conditions are met. This deduction is open for Indian citizens and NRI's.

The conditions are:

  • Only first-time house owners can claim this deduction.
  • The loan amount should not be more than INR 25 lakhs.
  • The property value must not exceed INR 40 lakhs.
  • Loan must be taken between 1 April 2013 to 31 March 2014
  • The owner must not have any other property on their name.

Claiming tax deductions against home loans

  • The loan must be taken on taxpayer’s name. A co-owner can also claim deductions.
  • The amount of the deduction that can be claimed also depends on the percentage of ownership share you have on the property.
  • The deduction can be claimed only after the construction gets completed.
  • You need to submit your "home loan interest certificate" to your employer to adjust TDS accordingly.
  • Or you can calculate the taxes by yourself and claim the refund during E-filing income tax.
  • You may have to deposit the dues on your own if it is taxable in any case.

The self-employed or freelancer don't need to submit any documents in anywhere and not even to the Income Tax Department. But you need to keep the documents safely in case IT department asks you for any proof.  In regarding tax payment, you will need to calculate that during calculating advance tax liability for every quarter.

Tax benefits on home loan for joint owners

  • A deduction up to INR 2 lakhs can be claimed against home loan by the joint owners.
  • Deduction up to INR,1,50,000 can be claimed against principal repayments, including the deduction for stamp duty and registration charges under section 80C.
  • The deduction will be allowed in a ratio in which the ownership of the property is shared.
  • If also the loan is taken jointly, you can only claim the deduction if you are co-owner of the property.
  • In the case of property owned between child and parents, where the child will pay off the loan, who is not a co-owner of the property will not get any exemption in tax.

Is it possible to claim both HRA and deduction on a home loan?

Yes, you can claim both the benefits if your employer offers HRA as a part of your salary component and you are paying a home loan.

Section II: Income from House Property

The “Income from House Property” section is specified to mention income generated from a house you owned. But if the property is used for carrying on business or profession than it should not be taxed under this section of the income tax form.

To calculate income from house property:

  • Gross Annual Value of the property: it is collected only when the house is on rent. If the house is occupied by self than the annual value of the property is Zero.
  • Now, less the amount if you pay any property tax. As that will be counted as a deduction.
  • Net Annual Value is the amount derived by deducting property tax from gross annual value.
  • Now less A 30% deduction for NAV and this does not include the expenses occurred for painting and repairing your house.
  • Less the amount, if you are paying interest on home loan. This amount is eligible for claiming a deduction for that.
  • Now the resulting value is your actual income from the house property and it will be taxed as per the tax slab applicable to you.

As property value for the self-occupied house is zero if you claim home loan interest deduction on it then it will be shown as a loss from house property and this loss will be adjusted against income from other sources.

Section III: Basics of house property taxes

What properties are included in the house property as per the Income Tax Act?

A home or office or shop or a building or land or parking lot that you own is referred as house property. All type of house property is taxed at same rate and income generated from them will be mentioned under the “income from house property” in the income tax return form. If a house property is used for carrying business or profession or freelancing work, then it will be mentioned under the “income from business and profession” head. Expenses on its repair and maintenance are allowed as business expenditure.

What does it mean by being the owner of a house property?

The legal owner of the house property is the person under whose name the property is legally registered. Someone who can exercise the rights of the owner of that property by himself, not on someone else’s behalf.

What does a self-occupied house property mean?

When someone uses a property for the own residential purpose it is called a self-occupied house property. The property can be occupied by the owner’s family and in that condition also, the property will be considered as a self-occupied house property. Also, a vacant property will be considered as a self-occupied house property. If the owner owns multiple house property then only one will be considered as self-occupied house property and the other will be considered as let out property. The owner can choose from the properties, which one he wants to use as self-occupied house property.

What is a let-out house property?

A house property that was on rent for the whole or part of the year will be considered as let-out property. Also, if someone owns two property than the second one will be considered let-out house property.

How is an inherited property taxed?

If you have any property inherited from your parents, then it will be calculated as your own property. If you have more than one property in total including that, than one from them will be considered as taxed property.

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