K. Aravind
Owning a home is everyone’s dream. But it takes a lot of effort to make that dream a reality. In addition to regular paperwork and meetings with bank officials and lawyers, you need to be careful not to get caught up in the complexities of the tax net. You will also receive tax benefits. Before owning a home, you need to understand the various aspects with regard to it.
Many taxpayers miss out on some of the tax benefits associated with home loans. Such errors can be avoided by properly understanding the tax deductions available to homeowners. Section 24 of the Income Tax Act provides for tax deduction for interest on home loan. EMI refund is tax deductible even you fail to pay it in some months. The loan is eligible for tax deduction as long as the liability on the interest item remains.
It is advisable to keep a copy of the interest certificate issued by the borrowing bank or financial institution in case of such tax deduction. As the loan amount and interest liability are recorded in this certificate, you can use it to explain if there are any questions from the Income Tax Department.
Long-term capital gains tax is applicable if the home is sold after two years of purchase or construction. Earlier, you had to pay the tax if it was sold earlier than three years, short-term capital gains tax would have to be paid. At the same time, if the house is sold within five years after the purchase or construction, the tax benefit will be forfeited. The amount previously tax deductible will have to be added to the income from the year the home was sold.
In case of sale within five years, the condition that the amount previously tax deductible must be added to the income was applicable only for 80C. Since a large portion of the EMI in the early years goes to interest, the return on capital is relatively small. Capital repayments are tax deductible under Section 80C of the Income Tax Act. Repayments on capital form only a small part of the EMI in the early years.
Paying the EMI alone does not provide a tax benefit. You are only entitled to a tax deduction if you own a home. Those who repay the loan taken for a home owned by their parents or spouse will lose the tax benefit. If the house is owned by the wife and the husband and both of them jointly take a home loan, both of them can claim tax relief. On the other hand, even if you have joint ownership of the house with your spouse, you will not get a discount if the loan is taken only in the name of the partner.
Tax deduction for interest repaid during the construction of the house will be eligible only after receipt of the completion certificate. Tax deduction on interest repaid at the time of construction is equivalent to the first five years after the completion of the house. That is, interest deducted in the year of completion of the house and one-fifth of the total interest repaid at the time of construction can be tax deductible. This can continue for five years.
