All you need to know about the various tax benefits Home Loan borrowers are entitled to for both ready and under-construction properties.

The average investor is always after the same thing: maximum return for minimum investment. In many ways, a Home Loan helps you in this endeavour by allowing you to make a large investment, but pay it off in small increments. It’s range of tax benefits also serve to minimize the overall cost of the loan.

In order to encourage and support first-time buyers to get on the property ladder, the government offers a range of tax benefits for those looking to take a Home Loan. Housing loans can be taken for purchasing or constructing a new house or property. Under the current policy, borrowers who opt for Home Loans are entitled to tax relief both when paying back the principal (under Section 80C of The Income Tax Act) and the interest (Section 24(b) of the same).

Ready Properties

When you take a loan in the same year as when you get possession of a house or property, then you are entitled to tax benefits both in terms of the principal and the interest. The maximum entitlement for tax exemption in terms of the principal is Rs.1.5 lakh and this benefit can be claimed regardless of whether the property is being rented out or is self-occupied.

On the other hand, in terms of exemption on interest payments, Section 24(b) of the Income Tax Act entitles you to exemptions on the interest payments of a given housing loan up to the amount Rs.2 lakhs for a self-occupied property. Conversely, for rented-out property, there is no such maximum limit and the entire interest amount can be tax exempt. However, this benefit can only be enjoyed from the year the possession is taken. What’s more, if a new loan is taken to repay an original Home Loan and is used for solely that purpose, then the interest paid on the new loan is also tax deductible.

Keep in mind that there are certain requirements that need to be met in order to avail such deductions, such as the fact that the loan cannot be used for improvement extension or renovation of an existing house.

Under-Construction Properties

For under-construction properties, the buyer or Home Loan borrower is allowed the same tax benefits as above as long as the construction is completed within a period of 5 years, after which the tax exemptions become minimal. If the construction crosses the 5 year period then the exemption amount for interest payments reduces from Rs.2 lakhs to a mere Rs.30,000. This used to be 3 years but was extended in 2016 for buyers who were losing their tax benefits as a result of delayed construction on part of the developer.

Under Section 24(b), as long as the construction is completed within this 5-year period, buyers are entitled to very same benefits of tax deductions on interest payments up to Rs.2 lakhs and a further Rs.1.5 lakhs towards the principal amount. Additionally, the total amount of interest paid on the housing loan before possession is taken, also known as pre-construction interest, can also be claimed in 5 equal instalments over 5 years.

In the case of first time buyers, the total exemption is increased by a further Rs.50,000 to Rs.2.5 lakhs for interest payments. This is true as of 2017 and is only applicable for loans taken after April 1st 2016.

Requirements for Making Tax Savings

In terms of what’s required to claim deductions, you require documents such as proof of ownership, proof of completion of construction as well as interest and principal details that have been used to calculate EMIs for that financial year.

It is important that those seeking a Home Loan are aware of the deductions they are entitled to, so they can make the most of the benefits when opting for a housing loan and save as much as possible. Your best bet may be to apply for a low interest Home Loan such as those offered by Bajaj Finserv.

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