Owning a home is an important milestone, and to promote such behaviour, the Indian government gave homeowners a tax break by allowing them absolutely no taxes on imputed income from renting their own place. Among these tax breaks given by the government is the deduction of interest on home loans under section 24 (B) of the Income Tax Act. Deducting this interest can reduce your taxable income and provide a sizeable saving. If you’ve taken out loans for homes, here is a comprehensive guide to help you as you move towards claiming a deduction on the interest payment for these loans.
Claim Interest on Home Loan Deduction Online
1. Understand the Eligibility Criteria
Before you can claim the deduction on interest payment for a house loan, the first step is to understand whether you qualify. The criteria include:
- Eligible Assessee: Only individuals and HUFs are eligible for the deduction. Companies and partnerships are not entitled to it.
- Property type: The property for which you are claiming the deduction must be a self-occupied or rented residential property. If the property is self-occupied, the deduction to (interest paid for the loan on that property) is allowed. If the property is rented, the deduction to (interest paid on the loan for that rental property) can be claimed.
- Loan Purpose: The loan must be taken for the purpose of either acquiring property or constructing, repairing, or renovating the property. Loans for other purposes–such as personal, commercial or investment financing–do not qualify for this deduction.
- Repayment of Loan: The deduction can be claimed only if you have actually paid interest on the loan during that financial year. It doesn’t matter whether principal repayment has been made or not, as the interest payment is entirely a separate deduction.
2. Know the Maximum Deduction Limit
Under Section 24(b), the maximum deduction you can claim for interest on home loans in a financial year is ₹2, 00,000. The deduction on rented properties has no limit, but you need to remember that you can only claim interest as part of the “Income from House Property” category in your return form(s).
3. Gather the Necessary Documents
To claim the deduction, you will first need to show all necessary documents.
- Home Loan Statement: Obtain this from the bank or financial institution where your loan is. The deduction for interest on home loans given in your income tax return will be based on this figure.
- Loan Agreement and Sanction Letter: Keep your loan agreement and sanction letter to hand in case you need to take out a new loan which will require further evidence that it is for the property looking to buy.
- Property Documents: For self-occupied properties or those being used for other purposes, you may need to refer to the property documents. This can include a sale agreement, possession certificate, etc.
- Proof of Rental Income (if applicable): In the event that you are claiming deductions for a let-out house, make sure to have records of the rent that was charged. This will be necessary for calculating deductions on your return.
4. Calculate the Interest Paid on the Home Loan
When you have assembled all of the required documents, it is time to work out how much interest you’ve actually paid on this loan. Your lender will provide you with a certificate or statement showing how much interest was paid out in the previous financial year.
Also, if your mortgage was for a property under construction (usually anywhere from one to five years long), then the interest paid during these years can be claimed back yearly in full as and when they are paid.
5. Fill out the Income Tax Return (ITR) Form
To claim the deduction, you must file your Income Tax Return (ITR). You must make sure that the home loan interest deduction is correctly accounted for when you fill out your ITR form.
- Select the Appropriate ITR Form: Select the correct ITR form depending on the sources of your income. Normally, ITR-1 (Sahaj) is used for salaried people having income from a single house property, while ITR-2 is used by those who have income from two or more house properties, or income from sources other than salary.
- Provide Details about Loan and Property: In the ITR form, a section is devoted to deductions under “Income from House Property”. For example, you must denote the property type (address, nature of the property, self-occupied / rented) and interest paid during the year.
- Fill in the Necessary Details of the Property: If claiming deductions on a self-occupied or rented property, you will also need to provide information about the property, including the address, type of property, and whether it is self-occupied or rented.
6. Claim Allowance for Pre-construction Period Interest
However, on the other hand, in the case of a home loan taken to finance the construction of a property, the interest paid during the construction phase can be deducted. But this is not claimed in the year of payment — instead, it is distributed over five equal instalments beginning in the year of possession. The most that can be claimed for the pre-construction period is ₹2,00,000.
For example, if in the construction period you paid ₹1,00,000 in interest, you could claim ₹20,000 each year over the following five years after possession of the property.
7. Keep Track of Changes to Tax Laws
Due to amendments to the Income Tax Act. The annual finance act will call for adjustments in your tax numbers if the amount of deduction for loan interest on real property or regulations governing who may apply are changed.
For instance, the government may up these limits of gobbling no interest by increasing the limit on how much you can borrow from 10% and then tax only 50% (plus an annual deduction for freehold land) until the purchaser completes three years during common use generally entitled up to full reimbursement.
8. Be Sure to Get Professional Advice
If your home loan or tax situation is complex, consult a tax expert such as a chartered accountant to help you maximize your deductions, get the full benefit of tax savings and make sure your returns are correct. He can also help calculate pre-construction interest or advice on the juggling of multiple homes for rent.
Conclusion
Using home loan interest deductions is an effective way of saving money and reducing your taxable income! Follow the above steps religiously and make sure that homeowners are able to take the fullest advantage possible from available relief. Whether it is your first home or a rental, it is the same: mastering how to claim this benefit will not only save you tax but also take some financial pressure off the responsibility of owning a house. Always remember to take the necessary documents, file your ITR as the case may be, and stay informed with tax law changes in order to maximize home loan interest deductions.
