Interest – Principal bifurcation

Home loans are repaid as Equated Monthly Instalments (EMI). Though installments remain constant every month, each EMI comprises an interest component and a principal component that keeps changing with each repayment. Details of this monthly bifurcation are projected in a borrower’s amortization schedule. For determining tax benefits, total interest accrued and total principal payments for a financial year are identified separately. Benefits are then applied under the following sections of the Income Tax Act:

Section 24(b) and Section 80EEA for interest accrued

Section 80C for Principal repaid

Self-occupied Vs Let out

Benefits differ depending upon the type of house owned. For the purpose of taxation, houses are classified as self-occupied or let out.

A self-occupied house is one that is used by taxpayers for their own or for their family’s residence. A taxpayer is allowed to include a maximum of two houses under this category. Any house that doesn’t so qualify as self-occupied, is classified as “let out”. It is interesting to note that even if the house is not actually let out on rent, it shall be ‘deemed’ as ‘let out’ for tax purposes. A real or notional rent is accordingly chargeable as Income under Chapter IV of the Act under the head: ‘Income from House property. Rental income from a self-occupied house shall be “NIL”.

Section 24 (b) - Benefit on Interest

From the rental income so determined, a deduction on account of Interest accrued is made under Section 24(b). This helps in two ways. Firstly, by reducing, or even negating the rental income and secondly by allowing any loss arising due to such deduction to be set off against income from other heads. For example, on a self-occupied property, a taxpayer is eligible to claim a deduction of Rs 1 lakh u/s 24(b). That would mean a “loss” of Rs. 1 lakh under the head ‘Income from house property”(Rental income: NIL less deduction u/s 24(b))

This loss can be set off against their ‘income from salary' or business income etc.

Interest accrued in pre-construction phase

It is normal practice to avail of a loan while the construction is still underway. Therefore, the act allows pre-construction interest to be included in section 24(b). A taxpayer can claim benefit for all interest accrued in the pre-construction phase over a span of 5 financial years starting with the first year of completion of construction. 1/5th of the total pre-construction interest can be included in each of these years for benefit u/s 24(b)

Amount of deduction u/s 24(b)

For self-occupied houses, deduction shall be restricted to an amount which is lower of interest accrued or Rs 2 lakh. In other words, if the total interest accrued for the year is more than Rs.2 lakh, then the deduction u/s 24(b) for that year shall be Rs.2 lakh only. If not, the deduction shall be equal to the amount of interest accrued that year.

For let-out properties, there is no upper limit on claiming the deduction. But by virtue of this deduction if the income from house property is negative (loss), then the maximum amount that can be set off against other heads of income will be restricted to Rs 2 lakh. Any excess can be carried forward for set-off in subsequent years.

Section 80EEA – Some more benefit on Interest

Section 80EEA is covered under Chapter VIA of the Act which deals with the general deductions from gross total income. The interest benefit u/s 80EEA can be availed only with respect to a loan sanctioned in the financial year 2019-20, for a self-occupied house whose value does not exceed Rs 45 lakh.

Deduction u/s 80EEA for a specific year shall be the excess of interest accrued over the upper limit of Rs 2 lakh which is claimed u/s 24(b). The total benefit that can be claimed u/s 80EEA for all financial years together is Rs.150000. Any amount which is not utilized out of this Rs.150000 can be carried forward and utilized in subsequent years.

Section 80C – Benefit on principal repaid

Section 80C is also a part of chapter VIA for deductions from total income. The idea of section 80C is to encourage investment in certain approved schemes like PPF, government bonds, or payment of Insurance premiums, etc.

Purchasing a house also qualifies as an investment and is eligible for a deduction under this section. The benefit is available for self-occupied as well as let-out properties.

Section 80C sets a maximum limit on all investments combined at Rs 1.5 lakh.

Co-owners/Co-borrowers

Most homes have co-owners who are also co-borrowers in a loan. A question often arises as to how these tax benefits shall be applied between them. The Act provides for each co-borrower to be treated as a separate tax payer with respect to their share in the interest and principal payments. In other words, the benefits as well as upper limits shall be applicable to each co-borrower separately. Thus, including a co-borrower can be a smart decision especially for a self-occupied property.

For most of us, buying a home or availing a loan are major decisions in life. It is seldom straightforward and involves consideration of many complex factors. Knowledge of the related tax benefits will only help in bringing better clarity to aid informed decisions.

The writer is a Chartered Accountant and Director at Insphigher Learning Pvt Ltd. The views expressed are personal