Having a roof over our head is one of the basic necessities of a human being, however, owning a house that we can call our own is a luxury not everyone can afford, however, with the help of home loans, many people have been able to fulfill their dream of owning a home.

The Government of India has been a significant catalyst in the growth of the home loan sector. In order to encourage citizens to invest in property, the government provides various tax benefits under the Income Tax Act of 1961.

A home loan comprises of both principal repayment and interest payments. Tax deductions can be availed under both these categories under section 80(c) and section 24(b) of the Income Tax Act respectively.

The government in its 2019-20 budget has made additions in an aim to benefit homebuyers further. The government has increased the deduction that can be claimed for interest paid on loans taken for affordable housing by 1.5 lakh (over and above the existing deduction of Rs 2 lakh) for houses having a value of up to 45 lakh. The deduction is available on loans taken up to March 2020. This is seen providing a benefit of Rs 7 lakh over a loan period of 15 years.

It is important for people to be aware of the income tax benefits that home loan borrowers are entitled to as it can help you save a significant amount of your tax outgo.

All about House Property

As per the Income-tax Act 1961, house property means any building or land adjacent to such building) owned by the assessee himself. House property includes flats, shops, office space, factory sheds, commercial building, agricultural land and farm houses etc.

When does a house property become taxable?

The income tax act has segregated the income received by an assessee into five different heads, among which one of them is income from house property i.e the income an individual earns from his property. For eg if an individual puts up his own property on rent, the rent received becomes taxable. However, if the assessee uses this property for operating or running a business or profession, it will not be taxed as income from home property.

Different categories of house properties

There are three categories of house property-

Self Occupied house property -This property is used by the taxpayer for its own residential purpose. This can also be occupied by the taxpayer's family. A vacant house owned by the taxpayer also falls under this category.

Until FY19-20, if a taxpayer had more than one residential property, he could only choose one as the self-occupied property and the other properties by default came under let out property, however now a taxpayer can choose up to two properties as self-occupied property for income tax purposes.

Let-out property -Under the income tax Act, a residential property that is rented for the whole or a part of the year comes under let out property.

Inherited property -A property passed onto by parents, grandparents etc again, can either be a self-occupied one or a let out one based on its usage as discussed above.

Home loan tax rebate can be claimed under which sections?

When a borrower takes a home loan, he has to make the payments for two components a) principal amount b) interest levied on the loan. Home loan borrowers can enjoy tax benefits for both these components under section 80(EE) and section 24(b) of the Income Tax Act respectively.

Section 80 (EE) of the Income Tax Act

Section 80 (EE ) allows tax rebate on the interest portion of the housing loan availed from any financial institutions. The deduction one can avail under this section is for an interest paid on a home loan for up to a maximum of Rs 50,000 per financial year. The deduction can be claimed until the repayment of the entire loan.

The tax deduction claim under 80(EE) is only available for home-owners having one house whose value of the property is less than 50 lakh and the home loan is less than 35 lakh.

Eligibility for tax rebate under 80 (EE)

1) The tax benefit can only be availed by an individual and not by any company or any other taxpayer.

2) In order to claim this deduction, the individual should not own any other residential property on the date of sanction of the loan.

3) Section 80EE is applicable on a per-person basis rather than a per property basis i.e if the house is jointly owned by the wife and husband and both of them are making payments towards the loan, both can claim tax benefits.

4) To claim this benefit, it is not necessary for the taxpayer to reside in the property for which he or she is claiming this deduction. Borrowers living in rented homes can also claim this deduction.

Section 24 of the Income Tax Act

Section 24 of the income tax act is related to the income generated from house property. What is income from house property? It is when the owner receives rent (income) by renting the property. If an individual owns more than one house, except for the self-occupied property, all the remaining properties are considered for income from house property.

Deductions allowed under Section 24

Standard Deduction: This exemption is given to all taxpayers, however, it is only applicable for let out property. Under this deduction, the assessee gets a standard rebate of a sum equal to 30% of the net annual value. Annual value is the amount of money that the property can earn if it is let out from year to year.

Interest on borrowed capital: Largely taxpayers opt for housing loans while purchasing a home, so this deduction is related to the interest component of the borrowed capital i.e. the interest on loans. So, if the taxpayer has taken loan then the interest paid by the taxpayer on the principal of the loan is exempted from taxation.

Even as home loans have their share of financial cost of EMIs over a long period, it, however, has a lot of benefits. Home loans help improve credit score when EMIs are paid timely and also helps in reducing tax liability by offering various tax benefits. A home loan, not only fulfills the dream of owning a home but also helps save a lot of money through such tax rebates.