Every individual needs to invest in a home; not just for the security it provides but also because of the incomparable tax benefits it proffers.
When you buy a property, there are tax benefits at multiple levels viz. on the interest paid on home loan, on the principal repaid and also when the property is let out. Let us look at some of the key tax benefits on home loan.
Benefits under Section 24 of Income Tax Act
Section 24 of Income Tax Act deals with the tax exemption on the interest paid on your home loan. Your monthly EMI paid on the home loan has an interest component and a principal component. Section 24 of Income Tax Act only deals with the interest component and you can get this break-up from your banker who has financed the property. This section offers an exemption of Rs200,000 per year on the interest paid on the home loan, subject to a certificate issued by the authorized banker financing the property. In case of self-occupied property, you can show the income from the property as zero, so the entire Rs2 lakh (subject to the maximum of actual interest paid) can be deducted from taxable income. If you are in the 30% tax bracket, you get 30% tax benefit on interest paid each year.
The above refers to self occupied property. In case your property is leased out, you get additional 30% standard deduction and Section 24 has no limits. However, effective the Union Budget 2019 the exemption will be restricted to Rs2 lakhs per year only.
Additional tax benefit under Section 80EEA for low cost housing
Union Budget 2019 had introduced a special addition to the exemption on home loan. In case of low cost housing (defined as up to registered value of Rs45 lakhs), there will be an additional exemption of Rs1.50 lakhs on interest paid. This will be over and above the exemption of Rs2 lakhs already available under Section 24. Effectively, in case of low cost housing, the overall benefit under Section 24 of Income Tax and Section 80EEA of the Act will add up to Rs3.50 lakh per annum. This is subject to the condition that the low cost home is purchased before March 31, 2020, but considering the government’s aggressive focus on low cost housing, this benefit should continue for some more time.
Benefit on principal repaid under Section 80C of the Income Tax Act
While Section 24 of the Income Tax Act and Section 80EEA pertain to the interest component, there is an additional exemption under Section 80C. The principal repaid on home loan is exempt under Section 80C of the Income Tax Act, of course subject to the outer limit of Rs1.50 lakhs. The principal repayment will have to share space with other eligible items under Section 80C like insurance premium, PPF, CPF, ELSS investments, tuition fees for your children, ULIPs, NSC etc. This largely limits the benefits that you can actually derive from this section.
Registration charges and pre-construction interest
There are some additional benefits in a property that most investors tend to ignore. For example, the registration charges paid to register the property in your name is also an exempt expense. That is available as a deduction under Section 80C of the Income Tax Act but can only be claimed in the fiscal year in which the registration is done and cannot be carried forward.
What about pre-construction interest? Normally, you start paying interest on the home loan even before you occupy the property. Any interest paid during this pre-construction period can be amortized equally over a period of five years.
Section 54 benefits on sale of house property
This is a special benefit when the long term capital gains on sale of property (held for more than 24 months) are reinvested in another property. This reinvestment can be done 1 year before the sale or 2 years after the sale. However, the property reinvested cannot be sold for 3 years, failing which the tax exemption will have to be foregone.
Investing in house property can be quite productive from the point of view of tax efficiency. The actual tax benefits extend much beyond plain vanilla Section 24.