Interest Claim on Home Loans

For those tax payers who want to realize their dream of owning a house, the Income Tax Act has a provision which allows them to claim interest on loans taken for a house. The deduction is available for the loan taken not only for the purchase or construction of a house, but also for loans taken for the purpose of repairs and renovation of the house.
This article will discuss various provisions in respect of allow-ability of interest under income tax Act and conditions to be met for this purpose.

Number of properties eligible for this deduction:

There is no restriction with regard to the number of properties for which you can claim the interest. For the said purpose, the properties are classified into two categories -Self-occupied and  the Let out.

However in case you own more than one house, and these  houses are either  being used for self-occupancy or by your parents or any other relative from which  you do not receive any monetary compensation, you have to opt one of these houses as self occupied and treat others as self occupied. One  property can be treated as used for your own residence, whereas for other  properties, you have to offer notional rent for tax. In case of self-occupied property, the taxable value, known as annual value, is taken as  nil. In respect of all other properties, the actual rent received or expected to be received is taken as annual value of the property.

Limits up to which the interest claim is allowable:

In respect of the self occupied property, there is an overall limit of Rs.30,000  for which you can claim the deduction. However this deduction goes up to Rs.1,50,000 in case the amount has been borrowed after 1st April, 1999. However for claiming deduction of Rs.1,50,000 you have to satisfy two additional conditions. Firstly, the construction of the property should be completed or possession of the property should be taken within three years from the end of the year in which such money is borrowed.
Secondly, you have to obtain certificates from the lender specifying the amount of interest payable on such loan along with the fact that the money has been borrowed for the housing purpose. These certificates need to be produced before the assessing office in case your Return of Income is selected for detailed scrutiny, as presently you are not allowed to attach any document with the Return of Income.
There is no upper limit on the amount of interest which you can claim in respect of the let out  property or the property which has been treated as let out. In case of let out properties, you do not even have to produce the certificate of interest from lender also. However you will have to provide the evidence that the interest is in respect of the money which has been used for the purpose of buying, constructing or repairs etc. of the property. Even interest paid in respect of personal loans taken for making down payments or for repairs of the property can also be claimed without certificate from the lender.

When can you start claiming deduction:

Though you are entitled to claim deduction in respect of,home loan,taken for the purpose of constructing your own house or for the purpose of booking an under construction house, the actual deduction cannot be claimed till you take the possession. It can only start  from the financial year in which the construction of the house property is completed and possession is taken. However aggregate interest paid on the money borrowed while the property was being constructed will be allowed in five equal installments. First such installment can be claimed from the year in which the construction of the property is completed or the possession is taken.

Requirement with regard to holding period:

In respect of claims made towards housing loan repayment to specified institutions, you are required to hold the property for a period of five years from the end of the financial year in which you had taken the possession, failing which all the benefits allowed to you earlier under Section 80 C will be subject to taxation in the year of sale. However, there is no such requirement of minimum holding period in respect of interest allowance, failing which benefits allowed earlier will be reversed. However in case of interest paid for under construction property to claim the full interest, you have to retain the property for five years. Otherwise you will lose your claim for rest of the years.

Other points to be considered:

You may not be aware that you can claim the interest payable in respect of any money borrowed for the purpose of repaying the first loan taken for the purpose of construction, purchase or repair of your house. Thus interest paid on the second loan to repay the first loan is also allowable as deduction under income tax act.
There is a perception among general public that for claiming interest deduction, the home loan should be taken from banks or specified financial institutions. In reality this is not so. You can borrow the money from anybody including your relatives and claim the benefits of interest claim against your house property income.
Besides above stated purposes, you can claim even if you have actually not paid the interest but it has only been due.
I hope it is clear that the provision of deduction of interest from income is a great relief to the tax payers as it helps them in reducing the tax liability, at the same time helps them in creating an asset.