Published & Updated as on - 2015-02-21

As per the Budget 2013, first time home buyers are on a benefit spree as per Section 80 EE. There have been incentives in terms of tax deductions and tax benefits for purchase of residential property which have been enhanced over the past decade. However the current proposal is intended to enhanced benefits at individual tax payers the bottom/middle of the pyramid, wherein the middle class will largely benefit from this move.

Following is an explanation with a hypothetical example on how an individual can take benefit of a Housing Loan and the workings of an enhanced benefit as per the current budget proposals.

Income Tax Benefits on HML:

Income Tax benefit is available on the following differentiated components for a particular Financial / Assessment year:
• Principal Payment - Under Section 80 C
• Interest Payment - Under Section 24 and Under Section 80 EE

Let’s see how buying your first residential property works for you:

We suppose that you have selected a ready residential 2 BHK apartment for which the price is Rs 30,00,000, which includes all costs of the apartment, car parking, club amenities, registration, legal cost etc. Assuming that your financials and income support your eligibility, in general, you will get a housing loan of 80% of Rs 30,00,000, ie: Rs 24,00,000. For a 20 year loan term your approximate EMI will be Rs 24,000 per month.

What is an EMI?

EMI or Equated Monthly Installments is a fixed amount of money that you pay back to the Lender/Bank on a monthly basis for the tenure of the loan. The EMI is calculated on the basis of the Loan Amount, Interest Rate and Duration (Tenure) of the Loan.

An EMI has 2 components, the Interest Component and a Principal Component. Hence for the above example for an EMI of Rs 24,000 per month, a typical proportion will be Rs 4000 towards principal and Rs 20000 towards interest in the initial years. As the years go by, the principal component increases and the interest portion in the EMI decreases, however the EMI remains fixed every month (assuming the interest rates are not changed).

Hence, suppose you have taken a Rs 24,00,000 loan in April then for the year your approximate payment will be as follows:
• Principal Payment : Rs 4000 X 12 months = Rs 48,000
• Interest Payment : Rs 20000 X 12 months = Rs 2,40,000
• Total EMI paid for the year : Rs 3,20,000.

Tax benefit on Principal component

The principal paid is included under section 80 C of the Income Tax Act. As per this section, you ca claim tax deductions of upto Rs 1,00,000 every year on Principal paid during the year for your Housing Loan or investments made during the year into Insurance, PPF, ELSS and other similar products. Hence as per the above example, you have paid a principal component of Rs 48,000, hence you just need to invest the remaining Rs 52,000 into various products listed to claim the full benefit of Rs 1,00,000 where-in Rs 48,000 has been taken care of by the Principal paid for the housing loan.

Tax benefit on Interest component

Upto Rs 1,50,000 of the interest paid during the year for your housing loan can be taken as a deduction under Section 24 of the Income Tax Act. Hence as we have paid an Interest of Rs 2,40,000 during the year, we can claim a tax benefit of a max of Rs 1,50,000 for the year.
However from this year, ie FY 13-14, as per the Budget of 2013, you can claim a tax benefit of Rs 1,00,000 more than the Rs 1,50,000 as allowed previously, provided
• the housing loan is for purchase your 1st house,
• the loan has been taken between 1st April 2013 and 31 March 2014 and
• the loan amount is less than Rs 25,00,000
• Hence, instead of getting a deduction of Rs,1,50,000 now you can claim a benefit of Rs 2,40,000 which is the Interest component of the EMI paid during the year (limited to a maximum of Rs 2,50,000 for this FY).

How does tax deduction help

Now let us assume that you have an annual gross salary of Rs 12,00,000, then your approximate income tax liability is approximately Rs 2,00,000.
However with the above housing loan related deductions for a self occupied property, your taxable income is as follows:
• Gross Salary - Rs 12,00,000
• Less: Principal paid on Housing Loan - Rs 48,000
• Less: Interest paid on Housing Loan - Rs 2,40,000
• Net Taxable income - Rs 9,12,000
• Hence the approximate tax on the above is Rs 1,15,000, ie: a cool tax saving of Rs 85,000.

Loan benefits on Under Construction property

If you have taken a housing loan for a residential property which is under construction, you may either pay a pre-EMI (an EMI before the property is completed), or just the interest portion of the amount borrowed as loan, till the property is complete, after completion the full EMI will start.

You are not eligible to claim any tax benefit or deduction for the principal and the interest paid towards the housing loan, while it is under construction. We have seen often due to ignorance of the individual and the consultant (tax agent) many take the tax benefit even while the property is under construction. This should be absolutely avoided and it is important to have a qualified and experienced tax consultant who can guide you effectively and efficiently, rather than filing your returns through a neighborhood agent, who also acts as your investment advisor and many other roles.

However, there are provisions for carrying forward the interest component paid during the under construction phase of the property and claim benefits post completion of the property, which a tax consultant will be able to advise you best on.

Joint Loans

Often, joint housing loans can provide you an enhanced tax benefit. For example, suppose n the above example, the property you purchased is your 2nd property then your tax benefits are limited to Rs 48,000 for the Principal portion and Rs 1,50,000 for the interest component (as it is your 2nd property, you will not be able to claim the enhanced Rs 1,00,000 tax deduction as the Budget 2013). However you have paid an interest of Rs 2,40,000 but you would have claimed only upto Rs 1,50,000. However f you had a joint loan holder, the joint loan holder could have claimed the remaining Rs 1,40,000, and hence benefited both and more enhanced compared to a single holder.

However care should be taken while claiming benefits for joint holders as there are few terms and conditions as per the Income Tax Act for claiming the enhanced benefit which should be duly satisfied. For this you should consult a qualified and experienced tax consultant and then only proceed.

Eligibility conditions for 80 EE benefit
• The assessee claiming the deduction must be an individual.
• The individual must not own a residential house property on the date of sanction of the loan.
• The amount of the loan sanctioned should not exceed Rs 25,00,000.
• The loan must have been sanctioned between 1 April 2013 and 31 March 2014.
• The lender must be either a bank, or a “public company” formed with the main object of providing long term housing finance.

Hence you can get an extended tax benefit for the interest component on your loan for a property purchase as per qualification under section 80 EE.