Tax benefits on Home Loan

Tax incentives
The Income Tax Act has incentives for those who buy residential property.

The interest paid on a housing loan borrowed to purchase or construct a house is deductible from the total income of an income tax assessee.

This has been a major incentive that encourages people to invest in a house.

Interest on the amount
In case a property has been acquired or constructed with borrowed capital, the interest payable on the amount borrowed for the period prior to the previous year in which the property has been acquired or constructed is also eligible for deduction. The interest is deductible in five equal installments commencing from the previous year in which the house has been acquired or constructed.

The first installment is deductible in the year in which the construction of the property is completed or it is acquired, and the balance four installments in the four subsequent years. The maximum amount of deduction available is Rs 1.50 lakhs, provided some conditions are satisfied.

The interest is allowed as a deduction on an accrual basis, i.e., on due basis, even if it has not actually been paid during the year. The primary condition is that the assessee should borrow the money. The interest should be payable on borrowed capital.

Loan for various purposes

The loan can be taken for any of these purposes -

Acquisition of property

Construction of property

Repair of property

Reconstruction of property

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Conditions to be met to avail deduction of Rs 1.50 lakhs
Residential property should have been acquired or constructed Capital should have been borrowed on or after the April 1, 1999 for the acquisition or construction. The acquisition or construction should have been completed within three years from the end of the financial year in which the capital was borrowed. The lender should certify that the interest is payable towards a loan advanced for the acquisition or construction of a house. In case these conditions are not met, instead of Rs 1.50 lakhs, the limit will be reduced to Rs 30,000. Interest paid by a borrower on a fresh loan taken to repay an old loan is also allowed as a deduction.

The date of commencement of construction is of no consequence. What is important is the fact that the construction should be completed within three years from the end of the financial year in which the loan has been borrowed. Also, it is not required that the entire cost should be financed through a loan. A part of the cost of the house can be financed through a loan and the balance through other means. However, for tax planning purposes, it is always better to borrow to the maximum extent rather than use own funds.
source - ET