Tax deductions on Home Loan & HRA for Self Occupied House Property

Here is how you can claim tax deductions on the interest paid on home loan and HRA for Self Occupied House Property:

Tax deductions on home loan & HRA for Self Occupied House Property - mainWhenever we talk about the tax deductions on House Property, the first few questions that catch our attention are:

• Whether the house is self occupied? or
• Whether the house is vacant? or
• Whether the house has been let out on rent?

The first question in the list gives rise to quite a familiar term ‘Self Occupied House Property’ which many of you must have come across while claiming a tax deduction for the interest paid on the home loan or when you look for tax exemption in case of an HRA. This post will take you through the details of Self Occupied House Property and its tax implications on the home loan and HRA.

What is a Self Occupied House Property?

A Self Occupied House Property is one which has been owned and used for your residential purpose. The property has to be occupied by you for the entire year. It may also be occupied by your family members such as parents and/or spouse and children. A vacant house property is also considered as the Self Occupied Property for the calculation of the tax liability.

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Notes:

• If the property is occupied by the owner and has not been rented out anytime during the previous year, the annual value of such property is considered as NIL.
• If the property value is NIL, no other deductions are allowed under Section 24 except the claim for the interest paid on the home loan subject to a maximum of Rs. 2 lakh in a financial year.

What if I own more than one Self Occupied House Property?

If you own more than one self occupied house property, only one of them will be treated as the self occupied and the others will be treated as the let out properties. The onus of which property to be considered as the self occupied is completely left on the owner of the properties. The value of the property chosen as self occupied will be considered as NIL, and for other house properties, the tax will be computed on the let out/rental basis.

What is a Let out House Property?

A let out house property is the one which has been on rent for the entire or a part of the year. There is no limit on the interest on the home loan that can be claimed for tax deduction in case of let out property.

Self Occupied House Property and tax deductions on Home loan

If you have taken a loan for the purchase/construction of the house property, you can avail tax benefits for the interest paid on loan under Section 24(b) of the Income Tax Act, 1961. However, the ownership and possession of the house play a crucial role in the determination of the claim for deduction of home loan interest.

• You can claim for the income tax deductions up to Rs. 2 lakhs on the home loan interest if you/your family is living in the house.
• In case the house is vacant, you can still claim for tax deduction up to Rs. 2 lakhs in a financial year.
• If the property is rented out, the entire interest paid on the home loan during the fiscal year is eligible for tax deduction.

To claim Rs. 2 lakh rebate, following conditions has to be met:

• The home loan must have been availed for the purchase or construction of a new property.
• The loan should have been availed on or post April 01, 1999.
• The acquisition or construction of the property must have been completed within three years from the end of the FY during which the loan was taken.

Note:

As per the new provision for the tax deduction on the interest paid on home loan, acquisition or construction of the property must be completed within five years from the end of the FY during which the loan was taken. This new rule will come into effect on April 01, 2017 and will apply to the assessment year 2017-18 and so on.

You can also claim the tax deduction of the principal amount repayment under section 80C of the Income Tax Act, 1961 up to a maximum of Rs. 1.5 lakh in a financial year.

What if the construction of the property does not get completed within three years?

If the construction of the property does not get over within three years from the end of the FY when the loan was taken, and the property is not acquired, the deduction on the home loan interest will be restricted to Rs. 30,000. For instance, if the loan was taken in August 2014, then the construction of the property should have been completed by March 31, 2018.

Notes:

• If the loan facility has been availed for repair, reconstruction or renewal purpose, the deduction is restricted to Rs. 30,000 only.

How to claim the tax deduction for the interest paid on the home loan for the property under construction?

You cannot claim the tax deduction on home loan interest for the house property which is under construction. The deductions can only be claimed from the financial year in which the construction gets over. The period beginning from the date the loan was taken until the time the construction of the property gets over is known as the pre-construction period. Interest paid on the home loan during this period can be claimed for the tax deduction in five equal installments beginning from the year in which the construction of the property gets over.

Let’s understand this with an example:

Mr. Avinash took a home loan of Rs. 25 lakh in April 2013 to construct a house and is paying an EMI of Rs. 25,000 per month since then. The construction of the property got over in May 2015. In this scenario, Mr. Avinash can claim for the tax deduction on the home loan interest starting from the FY 2015-16.

The total EMI paid by Mr. Avinash for the FY 2015-16 will be Rs. 3,00,000 (Rs. 25,000 * 12) out of which the principal repayment is Rs. 60,000. Hence, the total interest payment on the home loan will be Rs. 2,40,000 (Rs. 3,00,000 – Rs. 60,000). If Mr. Avinash rents out the house after the construction, he can claim the entire interest paid on the home loan for deduction under section 24 in the FY 2015-16. On the other hand, if he or his family occupies the property or the property remains vacant then he can only claim up to a maximum of Rs. 2,00,000 in a financial year. He can also claim for the deduction of principal repayment of Rs. 60,000 in this case.

Note:

Mr. Avinash should not sell his property for the next five years in which the claim is made or the amount claimed under Section 80C will be added back to his income for the year when the property is sold, and he has to pay tax on such income accordingly.

Now, consider the case of pre-construction period-

In this example, the pre-construction period starts from April 2013 and ends in May 2015 when the construction gets over. However, the pre-construction interest deduction will be allowed from April 2013 till March 2015. The total EMI payment during this period will be Rs. 25,000 * 24 months = Rs. 6,00,000 out of which the principal repayment is Rs. 1,00,000.

So, the pre-construction interest will be Rs. 6,00,000 – Rs. 1,00,000 = Rs. 5,00,000. This pre-construction interest can be claimed in five equal installments of Rs. 1,00,000 each beginning from the FY 2015-16 in which the construction got over. So, the total claim that can be made by Mr. Avinash in FY 2015-16 for the interest paid on home loan is Rs. 2,40,000 + Rs. 1,00,000 = Rs. 3,40,000, if he has rented the property after the construction.

tax deduction on home loan interest for the property under construction

What if the property has been partly self occupied and partly rented out during a financial year?

In this scenario, the property will not be considered as self occupied and there will not be any upper limit to claim tax deduction for the interest paid on the home loan.

Also read: Capital Gains on House Property: Calculation & Tax Planning

Computation of Income from Self Occupied House Property

For the calculation of income in case of self occupied property, the gross annual value of the property will be taken as NIL if the house is occupied by the owner throughout the previous year and no other benefit has been availed by the owner on such property. Also, if the annual value is NIL, the municipal tax deduction is not allowed for such property.

Let me take you through an example to help you understand the calculation:

Mr. Atul owns a house property and has been staying in it since April 01, 2015. The municipal value of the property has been computed as Rs. 1,50,000. He also took a loan for the construction of the property and had paid Rs. 1,44,000 as interest on the loan for the FY 2015-16. His income from salary is Rs. 5,50,000 and other sources Rs. 1,00,000. Calculation of income from such self occupied property is illustrated in the table below:

Computation of Income from Self Occupied House Property

Notes:

• No income had been generated from the property in this case as it is self occupied by Mr. Atul and since he has paid an interest of Rs. 1,50,000 in the FY 2015-16, which is an expense, therefore the income from House property in the above table has been taken as -1,50,000.
• The net income has been calculated by subtracting the income from house property from the total income generated i.e. Income from salary and other sources (Rs. 6,50,000 – Rs. 1,50,000 = Rs. 5,00,000).

Also read: 11 Points to remember before you buy a House Property

Self Occupied Property & House Rent Allowance (HRA)

To avail the HRA exemption benefits, following scenarios need to be taken into account:

1. If you are living in a house owned by you, the HRA paid by your employer is fully taxable and you cannot claim any tax benefits.

2. If you have bought a house in one city and you are residing in another city on rent for employment or business purpose, you are entitled to HRA claim up to the extent permitted under Section 10(13A) Rule 2A.

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3. If you have bought a house in one city and your family is living in the house it will be taken into account as self occupied house property. However, if you are employed in another city and living in a rented house, you can still claim for HRA exemption.

4. If you own a house in a city and you are not living in that house for genuine reasons. But, you are staying in a rented apartment in the same city, you can claim for HRA exemption as per Section 10(13A) Rule 2A.

Let’s understand the calculation for Exempted HRA with the example below:

Mr. Anil works as a Senior Manager for an IT firm in Mumbai and is paying a rent of Rs. 25,000 per month. He is getting an HRA of Rs. 30,000 per month and is drawing a basic salary of Rs. 60,000 per month. The HRA calculation will be as per the table below:

calculation of Exempted HRA for Self Occupied House Property

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