Taken a home loan? Then you are surely aware of the tax benefits you will get on your loan.
What we are discussing today, however, is the interest component not the principal repayment of your loan.
If you take a loan to acquire or construct a house property, the interest you pay is eligible for a tax deduction under Section 24 of the Income Tax Act.
Most of you would be following a simple procedure. At the start of each financial year, you get a provisional tax certificate from the Home Finance Company. You would have to submit this to your company's payroll department and let them compute the deduction.
That sounds fine. Except that you might be missing something. Let me explain.
1. Interest paid during the pre-construction period
When the final amount is disbursed by the HFC, you start repaying the loan via Equated Monthly Installments. This is the amount you pay every single month.
But, before the home loan company makes a final disbursement, they make partial disbursements to the builder based on the level of construction completed. You would have to pay interest on the amount partially disbursed too. This is known as pre-EMI.
Of course, in the case of an advance disbursement (entire amount is paid to the builder before construction is complete), there is no pre-EMI since the EMI starts immediately.
Interest paid during pre-construction period is allowed as a deduction equally over five years starting from the year in which the construction is completed. Let's take an example to make it clear.
Let's say you took a home loan in February 2004.
The property was constructed in July 2005 and final disbursement was done.
During this time -- from February 2004 to July 2005 -- you paid pre-EMI.
Then 1/5th of the total interest paid from February 2004 till March 2005 is available as deduction. This amount can be distributed over the five financial years starting from FY 2005-2006.
The interest you pay from April 2005 till June 2005 is allowed as a deduction in the FY 2005-2006. This is because April/May/June period is excluded from pre-construction period.
Pre-construction period is the period starting from the date when the first installment of the loan was disbursed and ending on March 31, immediately preceding the financial year in which construction in completed (as the example above explains).
2. Interest as per the provisional certificate could be incorrect
The provisional tax certificate is given to you at the start of each financial year by the HFC. It is based on the interest rates prevailing as on the date of that certificate.
However, interest rates have been on the rise since the start of this financial year.
So, if you have a floating interest rate loan, the interest actually paid by you would be more than what is stated in the provisional tax certificate.
Don't worry. At the end of the financial year, the HFC will give you a final tax certificate. Make sure you use this to claim the deduction for the additional amount when filing your tax return.
3. Deduction can be claimed even if the actual interest payment is not made during the year.
Let's say you took a home loan during FY 2005-2006 and your EMI date is on the fourth of each month.
So the last EMI for the financial year was paid on March 4, 2006. The tax certificate issued by the HFC might mention only the interest paid by you till that date.
Actually, even the interest accrued from March 4 till March 31 (which is paid in the April 2006 EMI) is also allowed as deduction.
If the tax certificate does not mention the amount of interest accrued from the date of last EMI till March 31, you can claim it separately while filing your tax return.
If, on the other hand, you could not honour your last few EMIs, say for February and March, you can still claim tax deduction on the amount of interest paid in this period. But, if the HFC levies an interest on account of delay in payment, this additional penalty interest is not eligible for deduction.
4. Interest paid on personal loan or loan from friends/relatives
You may be surprised to know this also qualifies for tax deduction. It is not necessary that the interest should have been paid only to a HFC.
If you took a personal loan or a loan from a friend or relative to meet the cost of the house (or a part of the cost), you can get a deduction on the interest paid.
5. Limit on the amount of deduction
In case of self-occupied property, the limit for deduction is Rs 150,000. If the loan was taken before April 1, 1999, then deduction will be restricted to Rs 30,000.
There is no cap on the amoun of deduction if the property is let out or deemed let out (this is when you own two homes and, for tax purposes, the annual value would equal the annual rent received had it been let out). Read 2 homes? Check the tax impact to understand this in detail.
On a closing note, deduction cannot be claimed in the FY 2005-06 if the property was under construction as on March 31, 2006. Deduction starts only from the year in which construction is completed.
ADROIT is a Pune-based firm that specialises in providing domestic and international tax services to salaried individuals and professionals. They can be reached at tax@adroitservices.in
