Did you know your home loan interest can help you with tax benefits?

To make our dreams come true, we often move heaven and earth, just like buying a home for you and your family. While the lucky few may have enough money to do that, not everyone can do that. As we said, we will do just about anything to make our dreams come true. To buy your dream home, you do not need to do much. Just a home loan from a financial institute like Tata Capital will do. However, home loans involve repayment along with interest, which basically spells out additional cash outflow. But what if we told you that your home loan could help gain tax benefits?

Home loan tax benefits are like a good dessert after an amazing meal. The home loan, much like the main dish, helps you own your dream house. It is the home loan tax benefit that completes this wonderful experience. You must be wondering how? Firstly, tax sops are a part of the government’s move to promote house ownership. So, when you decide to avail of a home loan, the interest you pay on home loans can be used to claim tax benefits. To know how much that amount can be, all you need to do is use a home loan EMI calculator to find out your monthly outgo and adjust the EMI for the major tax savings coming your way. You can also check Tata Capital’s home loan eligibility.

Interest-ing benefit

A home loan for the purchase or construction of a house/home should fulfill its main goal: completing home construction. So, such home loans must lead to the home’s completion within five years from the end of the financial year in which the home loan was taken. The EMI, or equated monthly installment, paid by you to home loan providers like Tata Capital, comprises the partial principle and partial interest.

The interest portion of every EMI paid for the financial year can save tax. This is because the home loan EMI interest is claimed to deduce your total income to a maximum of Rs 2 lakh. This is for self-occupied house property. Any individual who has availed a home loan and has occupied the same property can deduct up to Rs 2 lakh on interest paid towards the home loan. For let-out property, there is no upper limit for claiming home loan interest. For the let-out house, you can claim deductions only on the interest payment. Find out your total interest paid on the home loan, use the home loan EMI calculator on the website of institutions that give home loans.

Do note that if the property is sold within three years of purchase, the transaction’s profit will be considered a capital gain. Naturally, the gain will be taxed as per the slab the property seller falls under. To properly claim interest tax benefit, calculate the tax deduction to be claimed properly. Please ensure that the house/home is in your name or the home loan co-borrower. Submit your home loan interest certificate to your employer to adjust the tax-deductible at the source or at the final return filing stage to claim a tax refund.

Pre-construction window

Many home loan takers bear EMI during the pre-construction period. This happened when you bought an under-construction property. You have not moved in yet, but you are still paying the EMIs on the home loan. As you read in the above section, your eligibility to claim interest on home loans as a deduction starts only after the completion of home construction. For those who buy ready-to-move-in homes, you can tax benefit instantly. But what about the thousands of people who buy under-construction homes? Will they get no tax benefit? The short answer: they can get a tax benefit.

The income tax law has relevant sections for claiming tax benefits in the pre-construction period on the interest paid. This is in the form of a deduction in five equal installments starting from the year the property was acquired or completed. Interestingly, this deduction is over, and above the deduction, borrowers are eligible to claim from their house property income. However, do note that the maximum eligibility remains capped at Rs 2 lakh only.

So, to quickly recap: you cannot claim home loan tax deductions till the construction is completed, but once it is completed, you can, of course, claim an aggregate of interest paid for the period before the year of taking possession. This claiming can be claimed in five equal installments from the year in which construction is completed.

Ricardo L. Dominguez

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