Tax benefits are available on home loans. They can be claimed on both the principal as well as the interest components of a home loan as per the rules of Indian Income Tax Act. These deductions are available to assessees who have taken a loan to either buy or build a house, under Section 24(b) of the Indian Income Tax Act.
Interest on borrowed capital - If the following conditions are satisfied interest on borrowed capital is deductible up to a maximum of Rs 1.5 lakhs:
1.Capital is borrowed on or after April 1, 1999 for acquiring or constructing a property
2.The acquisition/construction should be completed within there years from the end of the financial year in which capital was borrowed.
3. The lender certifies interest payable on amount advanced for acquisition or construction of the house, or as refinance for the principle amount outstanding under an earlier loan taken for such acquisition or construction.
If the conditions stated above are not satisfied, the interest on borrowed capital is deductible up to Rs 30,000. However, for that, these conditions have to be fulfilled:
1. Capital should be borrowed before April 1, 1999 for purchase, construction, reconstruction, or repairs of a house.
2. The capital is borrowed on or after April 1, 1999, and construction is not completed within three years from the end of the years from the end of the year in which capital is borrowed .
In addition to the above, principal repayment of the loan/capital borrowed is eligible for a deduction of up to Rs 1 lakh under section 80c from assessment year 2006-07.
The maximum deduction permissible in a financial year for the original loan (if any) plus for any additional loans taken is Rs 1.5 lakhs. Hence, if a borrower’s deductions on an existing loan are less than Rs 1.5 lakhs, he can claim further benefits from the additional loan taken subject to an upper limit of Rs 1.5 lakhs for a financial year.
It is to be noted that the tax benefits under Section 24and deduction under section 80c of the Income Tax Act can be claimed only when the payment is made. If a person fails to make EMI payments, he cannot claim the tax benefits.
Who is eligible for rebate?
According to the income tax Act, only the person who has taken the loan can claim tax rebates.
A husband and wife, both of whom are tax payers with independent income sources, can get tax deduction benefits, with respect to the same housing loan. In this case, the tax benefits can be shared to the extent of the amount of loan taken in their respective names, If it is proved that the home loan is simply an arrangement between the loan seeker and the builder or with a third party for the purpose of claiming tax benefits, they will not be allowed and benefits previously claimed will be clubbed to the income and taxed accordingly.
Capital gains tax – Short Term vs Long Term
If a person buys a house and sells it within the same year/after three years, and if any profit is made, then a capital gains tax liability arises., For example, if X purchases a house for Rs 25 lakhs by taking a loan and he sells it in the same year for Rs 35 lakhs, he makes a profit of Rs 10 lakhs. On this profit, he will be liable to pay short-term capital gains tax since the sale took place in the same year.
But, if the sale had taken place anytime three years after purchasing the house, a long-term capital gains tax liability would have arise.
The long–term capital gains will be exempt from tax if the profit amount (after factoring in the indexation benefits ) is invested in capital gains tax saving bonds or in house as specified under Section 54.
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