Making your home loan work for you

It is well known that certain tax sops are available for housing loans. Vikas Garg and Lubna Kably from Ernst & Young explain the finer points.

It is well known that certain tax sops are available for housing loans. Vikas Garg and Lubna Kably from Ernst & Young explain the finer points

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Mahesh is dreaming of constructing his own bungalow in Gurgaon. He is wondering whether there will be any tax breaks available to him against a housing loan taken for this purpose, or are tax breaks available only against purchase of a ready to occupy flat. His queries on various issues are addressed in this article.

What is the maximum amount of interest against the housing loan that can be claimed as a deduction? In case of self-occupied property, for which a housing loan was taken, a deduction of up to Rs 150,000 per year can be claimed if the loan was taken after April 1, 1999 and the acquisition or construction of the property is completed within a period of three years from the end of the financial year in which the loan is taken. However, in the case of property which is let out, deduction is available for the actual amount of interest that is paid.

Mahesh should remember that he can begin to claim the interest as a deduction only from the financial year in which the construction is completed. Interests on loans taken for repair, renewal or reconstruction of an existing property are also eligible for a similar deduction.

On the other hand, if a house property, say a flat, is purchased, interest can be claimed from the financial year in which the flat is acquired.

With respect to the interest for the pre-acquisition or pre-construction period, the interest deduction can be claimed equally over a period of five financial years starting from the financial year in which the event of acquisition of house property or completion of its construction occurs.

Is a deduction available on repayment of the principal amount back to the bank from whom the loan was taken? As regards tax breaks, there is additional good news. Deduction of the principal portion of the housing loan (taken for purchase or construction of the residential house) together with amount paid for stamp duty, registration fee and other expenses for the purpose of transfer of the purchased property is allowed as a deduction up to Rs 100,000. This is available under Section 80C of the Income-Tax Act.

However, various other contributions and subscriptions, such as contribution to Provident Fund and subscription to NSC Certificates VIII issue are also eligible for deduction under this section. The cumulative deduction is subject to a maximum cap of Rs 100,000.

It should be remembered that deduction is not available in respect of certain costs. For instance, Mahesh should remember that the cost of any addition or alternation, or renovation or repair of the house property which is carried out after issue of the completion certificate by the authorities or after the house property has been occupied or let out cannot be claimed by him.

Certain other costs, which are more likely to be incurred against purchase of a flat in a cooperative society such as admission fee, cost of shares and initial deposit for becoming a member of the society also cannot be claimed.

How to claim such tax deductions? Once Mahesh is eligible to commence claiming the deduction for interest and the repayment of loan, as explained above, he should provide his employer with the certificate from the institutions from which he has borrowed the loan. This certificate must state both the principal amount and interest amount due for that particular financial year.

A provisional certificate is generally provided by the institution to enable the employer to take into consideration these tax breaks and thereby deduct less tax per month from salary income. The final certificate is generally available after the end of the financial year. If for some reason, Mahesh has not provided these documents to the employer, Mahesh can claim these tax breaks while filing his tax return.