Home Loan Tax Benefit: Finance Trading Times

Home Loan Tax Benefit

Continuing our series on home loan articles, in this article we discuss the case of Tax Benefits on Principle repayment on Home Loans. Previous article was on Tax Benefit on Interest Rate Repayment of Home Loan. You can have a look at the other Home loan Tax Benefits Scenarios at All Home Loan Articles where we discuss various scenarios on eligibility for home loan tax benefits.
The problem is with the component of Principle repayment of home loan. Why? The reason is that this component is considered under section 80C of the IT act. Unfortunately, there are lot more other investments which are clubbed in section 80C, and the ENTIRE SUM TOTAL of all these components has a maximum tax benefit limit set to 1 Lakh ONLY. Home Loan
What are the other Components clubbed into Section 80C along with Principle Portion of Home Loan Repayment for Tax Benefit?
Along with Principle Portion of Home Loan Repayment, there are Provident Fund, PPF, NSC Savings, Life Insurance Premium, ELSS, Pension Funds, Tax Savings Fixed Deposits, etc. For a full list of what all is covered, please see our article on Tax Benefit Section 80C.
Now that causes a problem - especially for salaried class people. Usually, Provident Fund gets deducted for each salaried person and that takes away the cream (or majority) of investment under section 80C. If your annual PF contribution is Rs 60,000, then you only have another 40K left for claiming tax benefit under section 80C.
Add to that a scenario if you also have a Life Insurance Policy with annual premium of Rs. 15K, then you are left with only 25K. Hence, to consider your tax benefit eligibility for repaying as principle of your home loan component, you must sum up all the investments/expenses you are making under section 80C. If that sum crosses 1 lakh, then you cannot claim any tax benefit for repaying as principle of your home loan component.
If that does not cross 1 Lakh (say it is only 75K), then the maximum you can claim for tax benefit on the principle home loan component is 25K.

Related: All Home Loan Articles
If you have any questions/queries regarding home loans or HRA claims, the FT Times team will be happy to address them. Please post your questions in the comments section by clicking on the link "Post a Comment" at the end of this page

Let's see that with an example.
Scenario No 1: Home Loan & Home Possession in the same Financial Year: i.e. say you took the home loan in April 2011 and got the possession of your home in February 2012 (both in same financial year (Apr 2011 to March 2012)
Suppose you are paying an EMI of Rs. 35,000 per month. So total you pay 35K *12 months = 4.2 Lakhs.
Out of this, suppose your interest component is 3.5 Lakhs and Principle component of home loan repayment is 70K.
Now, since the maximum limit on interest repayment tax benefit under section 24(b) is 1.5 Lakhs, your interest tax benefit will be only 1.5 lakhs, even though you have repayed 3.5 lakhs for interest component repayment.

Now come to the principle repayment, which is 70,000.
Here this comes under section 80C, which has a collective limit of 1 Lakh ONLY. Hence, if you are having Provident fund of Rs 60,000 and have also taken an Life Insurance policy of 20,000 making it a total of 80,000, then you have only (1Lakh - 80K) = 20K left for claiming principle repayment on home loan.
So even though you repayed 70,00 as principle of your home loan component, you can claim only 20,000 in the given scenario.

Scenario 2: Home Loan taken NOW for under-construction property. Possession received in next Financial Year: This is the typical scenario which occurs mostly. You book a flat in an under construction apartment. The builder promises possession after 1 year taking it to next financial year. So here is the example: Continue to next article Tax benefit on Pre-EMI home loan payment for under construction property
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2 Comments: Post your Comments

vkum said...(on 15 January 2015 at 22:59 )  

Dear Sir,
I have a property in joint names and home loan is on my name only other applicant is just the co-applicant with no emi share payment while having name in the property. I have now closed the home loan and taken my name out of the property(registry still not done). My question here is

1. I have shown principal payment of housing loan for FY 13-14 under sec 80c, will the excemption given under sec 80C will reversed as i have taken my name out of the property within 5 yrs. I have read somewhere that if property is sold within 5 yrs then exemption claimed for principal payment has to be reversed. In my case property is not sold (even it's not registered yet) only i have taken my name out of the property. Please advise.

2. Can I continue to claim 1/5 of the Pre EMI tax exemption under loss from house property for the next 3 financial year even though i no longer have my name in the property and housing loan has been closed. But all pre emi interest was paid by my self during under construction property.

vkum said...(on 15 January 2015 at 23:01 )  

Dear Sir,
I have a property in joint names and home loan is on my name only other applicant is just the co-applicant with no emi share payment while having name in the property. I have now closed the home loan and taken my name out of the property(registry still not done). My question here is

1. I have shown principal payment of housing loan for FY 13-14 under sec 80c, will the excemption given under sec 80C will reversed as i have taken my name out of the property within 5 yrs. I have read somewhere that if property is sold within 5 yrs then exemption claimed for principal payment has to be reversed. In my case property is not sold (even it's not registered yet) only i have taken my name out of the property. Please advise.

2. Can I continue to claim 1/5 of the Pre EMI tax exemption under loss from house property for the next 3 financial year even though i no longer have my name in the property and housing loan has been closed. But all pre emi interest was paid by my self during under construction property.

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