The purchase of a new home is amongst the most expensive investment we make in our lifetime. Most of us will invest a significant portion of our future income and our savings.
Buying a new home provides buyers with significant tax savings. You can:
- Claim a deduction of up to Rs. 1 lakh for repayment of home loan principal. This will come under the overall limit of Section 80C of the Income Tax Act.
- Claim an additional deduction of Rs. 1.5 lakh under Section 24B for interest repayment. This is applicable once you get possession of the home and move in.
Home Loan Principal Repayment
This is the first IT savings option you can consider after purchasing your new home. We are currently allowed to declare investments/expenses of Rs. 1.5 lakh per financial year. If the principal of your home loan works out to a maximum of Rs. 1 lakh per year, you can declare this amount. The remaining Rs. 50,000 must be declared through other investments.
However, there are two things you will need to remember if you are going to apply for this deduction.
- Deduction on principal amounts is only allowed if the house is fully constructed.
- If you choose to sell the property within the first five years, the deductions claimed for the principal payments are reversed. This is because, the amount that was deducted in the previous years will be considered as an income in the year of sale, and you will be taxed accordingly.
Interest Payment
The second option is to claim additional deductions for interest payment on your new home. If you have moved into the home you have purchased, you can additionally claim deductions of up to Rs. 2 lakhs under Section 24 of the Income Tax Act. Again, this is not applicable for homes that are under construction. Your property must be constructed within 3 years from the end of the financial year in which you took the home loan.
Do you know, that the interest you pay during the construction phase can be used to claim deduction for five years after possession? However, if the property is not constructed within those 3 years, then you will be able to claim deductions of only Rs. 30,000 per year.
If you choose to rent/lease your newly purchased home, you can claim deductions for the total interest amount paid. However, you will have to declare the income from house property in the tax return. Even if you choose to leave your home vacant, it will be still considered as a let out. You will then have to declare a hypothetical rental amount based on the market value and declare that said amount in the tax return.
Renovation/Rebate Loan
You can declare an additional amount under Section 24(b), if you have taken a home renovation loan. This amount is limited to Rs. 30,000 per year.
There is much to rejoice for those who have applied for joint home loans as well. Both parties can separately claim these deductions, thereby increasing your joint tax savings immensely.
