Income tax benefits of EMI on home loans

Very often tax payers take loans either for the purpose of buying a house or a flat or a car or for some other personal purposes. They are required to pay equated monthly instalments (EMI) of interest and principal.

In some cases both the interest and principal are deductible for purposes of income tax and in some cases it is not so deductible. Hence in this article we have discussed the benefits of EMI under the Income Tax Act mainly in relation to home loans. The section in this article pertains to the Income Tax Act, 1961.

House should be ready for occupation:

One of the most important aspects to be remembered by a tax payer is that the house or flat must be complete. If the house is not ready or is still under construction, then no deduction either on principal or interest would be allowable and permissible under the Income Tax Act.

Bifurcate EMI into Interest and Loan:

The next important aspect to be remembered by a tax payer is to bifurcate EMI into two parts. They are (i) Interest and (ii) Principal. This is because the deduction of interest as well as principal is governed by different sections of Income Tax Act. Therefore, this is the most important aspect to be remembered by a tax payer.

Interest on home loan for acquisition and repairs:

Under the provisions of Section 24, a deduction of a maximum of Rs 1,50,000 every year is permissible in respect of interest on home loan if the house is self-occupied. A loss up to Rs 1,50,000 of interest can be adjusted against salary income or business income or income from other sources. If a person has taken a loan for repair of house or flat, a deduction of maximum amount of Rs 30,000 is permissible and that too within the said amount of Rs 1,50,000.

Full interest deductible on let-out house:

If the house is let out by the tax payer, then the entire interest irrespective of the amount is fully deductible under Section 24 against income from House Property. In case the interest amount is more than the net rent, the loss under the heading "Income from House Property" can be adjusted against other income. It can even be carried forward in the future years

EMI instalment for acquisition also deductible:

Under the provisions of Section 80C the amount of EMI pertaining to the payment of principal for acquiring the house is allowable within the overall limit of Rs 1,00,000. This is for the purpose of acquiring a house through DDA or other housing board like HUDA or any other housing authority. The overall limit in this case is Rs 1,00,000.

Repayment of loan deductible:

Under the provisions of Section 80C (2) (xviii) deduction up to Rs 1,00,000 in respect of repayment of loan is permissible. The repayment of the amount borrowed for home loan by the assessee is deductible only if it is from Central Government or any State Government, or any bank, including co-operative bank, or the LIC, or the NHB, or a Public Sector Company providing housing finance, or any co-operative society providing housing finance or where the employer is an authority or a Board or a Corporation or any other statutory body or the employer is a Public Company or public sector company or a university or an affiliated Central Government or a local authority or a co-operative society.

Besides, stamp duty, registration fee and other expenses for the purpose of transfer of such housing property to the assessee is also deductible under Section 80C.

Courtesy: Tax Guru Newsletter