FAQs on Income Tax aspects of House

Q.1 What is home / when I am eligible to get deduction for interest and principal repayment of home?

As per Income tax act, income will be taxable or expenses can be claimed under one of the five heads. To get deduction on interest payment and principal repayment there should be a house (which one of the five heads of income tax). And hence deduction is not available for under construction home, as it does not have a legal validity. This is to avoid tax evasion, where people can show expenses of interest and principal repayment for a house which is never constructed.

Therefore any income, deduction is allowed only after the house is ready for occupation.

Q.2 What is self occupied home and how many home I can classify as self occupied homes?

Self occupied homes are homes which are being used by the owner for his residence. There is no deduction of standard deduction which is available for houses given for rental. Only 2 expenses are allowed as deduction for self occupied homes;

a. Municipal taxes paid
b. Interest on home loan:

One person can avail a maximum of Rs 1,50,000/- per annum as deduction. This includes interest paid after occupation and interest during construction period. However this does not include special deduction for first time home buyer.
Therefore self occupied home will always give negative income , which anybody can set off against other sources of income. Keep in mind that Rs 1,50,000/- deduction is applicable for an Individual.
Eg if there are 3 owners of a house property. Each and every individual can claim interest paid on home loan to the maximum of Rs 1,50,000/-.

You can get only one house as self occupied house. If it is more than house you own then automatically other house will be declared as deemed let out and will be taxable irrespective of whether it is actually let out or not.

Q.3 Can I claim HRA as well as declare my home as self occupied?

If you declare you have self occupied home, the you can not claim income deduction for rent paid under HRA. However under the below circumstance you can avail benefit of both When your working place is more than 50 KMs from the place where you own home, then rent paid for a home closer to office can be claimed as deduction under HRA and claim self occupied home status for the home owned.

Q.4 How will I claim Interest paid during construction period?

As mentioned earlier, expenses are allowed only under legal / taxable head. Since house property head does not arise, interest paid can not be claimed during that period. However interest paid during that period can be claimed if the below conditions are satisfied.
a. Construction should be complete within 3 years within 3 years from end of financial year in which loan was borrowed. If the construction period takes more than 3 years then the individual can not claim the deduction. Eg:Loan was borrowed on 1st sep 2008, construction was completed on 1st May 2013. 1st It is 4 years between 31st march 2009 (end of financial year in which loan was taken) to 1st may 2013. So no pre construction period interest deduction is allowed.
This interest will be allowed in 5 consecutive years from the year in which the house becomes to ready to occupy.
Eg: Ram has availed a loan of Rs 10,00,000/- in 2nd April 2009. Interest is 10% per annum. Construction is complete on 31st october 2012. The treatment will be as below
Pre construction period: 2nd April 2009 to 31st march 2012 (regular interest can be claimed from the year in which it is available for possession) Pre construction period interest: 10,00,000*10%*3= Rs 3,00,000/-
For the year 2012-13: Regular interest : rs 10,00,000*10%- Rs 1,00,000
Portion of pre construction period interest � (3,00,000)/5 � Rs 60,000
However a maximum of Rs 1,50,000 can be claimed as deduction as regular interest and pre construction period interest together.
Interest during construction period along with regular interest paid on home loan can not exceed Rs 1,50,000/- per annum per person.

Q.5 Special deduction for first time home buyer?

Finance Minister presented Union Budget 2013-14 in parliament. In the Union Budget 2013-14 a new Section 80EE inserted in Indian Income Tax, 1961 for additional deduction of interest on housing loan. An assessee able to take additional interest deduction on housing loan from Assessment Year 2014-15. To avail the deduction following conditions to be met;

1. House property value should be less than Rs 40,00,000/-
2. Home loan can not exceed rs 25,00,000/-
3. House should be bought on or before 31st march 2014
4. It should be the first home buy for the assessee

Please keep in mind that This is ONE TIME DEDUCTION. This can not be claimed every year. However if the assessee is not able to claim in the first year say (A.Y 2014-15) then the assessee can claim in next year (A.Y 2015-16).

Also this deduction is over and above the regular deduction.

Q.6 Income tax treatment of rented house:

Rented house has various deduction like standard deduction (30% of annual value), vacancy allowance, unrealized rent allowance. Also there is no limit of claiming interest paid on home loan (unlike self occupied houses where there is cap of Rs 1,50,000/- per annum)

Q.7 What is deemed let out property

Only one house per individual can be claimed as self occupied house. If more than one house an individual owns the other houses will be considered as let out even if it is used by the owner for self occupation.

Q.8 What is the restriction on principal repayment of home loan

An individual can avail deduction of home loan principal repayment from his her income if the below condition are satisfied;
a. Need to avail loan from bank / financial institutions. If any loan borrowed from other people deduction is not allowed
b. Deduction is allowed only when the payment is made in the respective year

Principal repayment is allowed to a maximum of Rs 1,00,000/- per annum. It is allowed for every individual. So co owners can get benefit in their individual return to the extent of Rs 1,00,000/-. This maximum limit includes for any investment made in PPF,Tax saving bonds, NSC, Insurance etc under the same section 80C.
Eg: Ram has made Rs 10,000/- as insurance premium, invested in Rs 50,000 NSC also paid Rs 75,000/- as interest on home loan. Under section 80C he can claim a maximum of Rs 1,00,000 deduction from his total income.

Q.9 Can I get deduction for interest paid on loan borrowed from my friends and relatives?

Interest on loan is allowed if you deduct TDS on interest paid. Moreover deduction is allowed on SBI home loan rate if it is borrowed from other than banks or financial institutions. There is no deduction under section 80 C for principal re payment, for loans borrowed from other than banks and financial institutions.

Q.10 What is present value? How do you come up with todays value?

Money of today is not equivalent of money of tomorrow. That is due to inflation, opportunity cost, risk of default etc. So future cost and income will be discounted to present days value by using discount factor of cost of borrowal for home buyer.

Q.11 What are the benefits of buying ready-to-move-in houses?

Ready-to-move-in houses give lot of income tax and financial benefits as below
Income tax:
a. Interest paid on Home Loan:
Interest paid on Home Loan is allowed as deduction for Ready-to-move-in houses from the date of buying home.
In comparison with a house which will be ready to move-in at later years, then the interest paid till available for possession will be given as five installments.
Eg: Ram has bought Ready-to-move-in house for Rs 40,00,000/- and took a loan of Rs 30,00,000/-. Interest on home loan Rs 30,00,000/-*10%- Rs 3,00,000/- is allowed as deduction from the first year.
Ganesh has bought a house for Rs 40,00,000/- and took a loan of Rs 30,00,000/-. But the house is ready for possession only after 2 years. Interest on home loan for 2 years will be allowed only after possession in five installments.
Rs 30,00,000/-*10%*2 - Rs 6,00,000/- Total Pre construction period interest.
Rs 6,00,000/5= Rs 1,20,000/- will be allowed as deduction from the third year to seventh year.
b. Principal repayment of home loan:
Principal repayment of home loan is not allowed during construction period.
c. No Service tax for Ready-to-move-in house. In comparison with 12.36% service tax for house under construction.

Note:
i. Maximum of Rs 1,50,000 can be claimed as deduction as regular interest and pre construction period interest together. Interest during construction period along with regular interest paid on home loan can not exceed Rs 1,50,000/- per annum per person. Since pre construction period interest is also being added to regular interest, some portion may not be utilized as it may exceed the threshold limit of Rs 1,50,000/-.
ii. Pre construction period interest will be allowed only when Construction is complete within 3 years from the end of financial year in which loan was borrowed. Eg:Loan was borrowed on 1st sep 2008, construction was completed on 1st May 2013. 1st It is 4 years between 31st march 2009 (end of financial year in which loan was taken) to 1st may 2013. So no pre construction period interest deduction is allowed.

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