Income Tax Rebate On Home Loans In India Tax Deduction Benefits On Interest As Well As Principle Payment

We all know that tax breaks are available for home loan borrowers, but how many of us are aware that there is a proper procedure to be followed to claim these benefits. To be precise, it requires the necessary documents to be in place before one seeks the tax benefits.

Keshav, 28, is a first-time loan taker. He is earning an annual salary of Rs 5 lakh and has just bought a small two bedroom flat with a floating rate loan of Rs 6 lakh for a period of 15 years at an interest rate of 10.5 per cent. He has taken the loan in January, this year and is concerned about the tax benefits that will be available for him. He is wondering how he will actually be able to get the benefits and what kind of paperwork will be involved.

Analysis

A home loan comes with income tax benefits, a feature considered significant by many home loan seekers. However, to avail these benefits a borrower needs to furnish some documents which are also necessary in the servicing of the entire loan.

What tax benefits are available to Keshav?

For Keshav, tax benefits will be available for both the interest as well as the capital components of the loan. On the interest part, a sum up to Rs 1.5 lakh is allowed as a deduction under Section 24 for a self-occupied property. This will be calculated under the head of 'income from house property'.

There are a couple of possibilities in terms of the ownership of a house property. When the buyer stays in the same house it is a self-occupied property and income from such a property is considered to be nil. The actual interest paid is reduced from the income till a sum of Rs 1,50,000 and since the income in this case is nil any interest paid will result in a loss for the individual. This loss can be adjusted against other income like 'income earned from salaries'. If the property is jointly held then the benefit will be split according to the share of the owners in the property. But joint ownership requires that the initial payment for the purchase of the property and the regular equated monthly instalments are paid by the joint owner in the proportion of their shares.

In case of a rented property, the rent earned is the income. Even if there is no income earned then there is a notional figure calculated as income for income tax purposes. The interest paid on a loan is then reduced from this income. The big difference for the individual in this case is that there is no limit of interest that is allowed as a deduction, so a figure even higher than Rs 1,50,000 will be available as a benefit.

The benefit on capital repayment is allowed as a deduction under Section 80C, where this will be a part of the overall limit of Rs 1 lakh. This is present for both owners of properties which are self occupied as well as those that are let out to others.

What are the documents that Keshav requires to produce?

To avail tax benefits, Keshav will have to initially get a provisional statement from the lending institution, covering the repayment of the loan. This statement is given at the start of the year or when the loan is taken for the first year; it gives a provisional figure regarding the break-up of the interest and the capital paid during the year.

In this case, the Equated Monthly Instalment (EMI) of Keshav is Rs 6,632, so for the 3 months of the financial year the total amount repaid will be Rs 19,896.

This statement can be used by Keshav to ensure a deduction under both heads – interest and capital – that can be possibly claimed especially if he is a salaried person and has to make the necessary investment declaration for the purpose of tax deduction.

This document has to be submitted along with the income tax return, and the various claims made in the return then have to tally with the figure so that the exact benefit for the year that has just passed can be claimed. Without this document, Keshav will not be able to get the necessary tax benefit.

                                              Read : Tax Guide

Is there any other document?

Depending upon the type of loan – fixed or floating – and the actual changes during the year, the position for Keshav might change at the end of the year. If he has ensured that the necessary instalments for the year have been paid and that the schedule has been followed, the bank will issue another certificate to him at the end of the financial year. This is the final certificate that exactly measures the amount of the loan repaid and its break up into capital and interest. In this case, Keshav will get a certificate for Rs 15,714 of interest and Rs 4,182 of capital repaid.

Course of action for Keshav

Keshav has to ensure the necessary certificate is obtained from the bank in time as small compliance issues can derail the entire tax benefit. Keshav has to get this certificate after the financial year is over but before working on the tax-saving details for submission to the tax authorities while the provisional statement has to be obtained at the start of the year.