Understanding The Tax Benefit on Home Loan Interest

Most of us took home loan for purchasing our dream house and it is a very good tax saving instrument. There is a lot of confusion about the tax benefit on interest on home loan among people and in companies also.

I have experience in my previous and current company (with old payroll vendor) that they allow tax benefit only on one home loan and up to 1.5 lacks. So if you have more amount for tax benefit (i.e. Interest on a second home loan etc.) you have to file return to get back the paid tax.

Based on my previous experience and interaction with many people I am listing some myths about the tax benefit on home loan interest:-

• The Max limit for tax benefit on home loan interest is 2.0 lacs ( which is partially true).
• You can claim tax benefit only on one home loan.
• If you are claiming tax benefit on home loan interest than you can not claim HRA (which is again partially true).
• If your house if under construction still you can claim tax benefit on the same year.

Tax benefit on interest on home loan allowed as per under Section 24 of the Income Tax Act. Lets try to understand the tax benefit on home loan interest.

Tax benefit on Interest on Home Loan for self occupied house

Tax benefit on the self occupied house is 2 lacs but will not be applicable if it meets the below 3 conditions:-

1. If capital is borrowed before April 1, 1999 for purchase, construction, reconstruction, repairs or renewals of a house property.
2. If capital is borrowed on or after April 1, 1999 for reconstruction, repairs or renewals of a house property.
3. If capital is borrowed on or after April 1, 1999 but construction is not completed within 3 years from the end of the year in which capital was borrowed.

For the above mentioned conditions maximum 30000 can be claimed for tax benefit.

One must also understand that only one house can be declared as self occupied. If you have more than one house then only one can be declared as self occupied and the other should be declared as let out.

Tax benefit on Interest on Home Loan for non self occupied house (let out)

If the house is not self occupied and declared as let out or if the home loan taken for the property other than self occupied and declared as let out then there is no maximum limit. Please note you have to pay the tax on income from rent (30% rental is tax free).

Please note if the house is not occupied by the owner because of his employment, business or profession carried on in any other place and he has to reside at the other place not owned by him, then maximum limit is 1.5 lacks. 

Tax benefit on Pre-Construction Interest on Home Loan 

1. If loan taken for the purpose of Construction/Purchase, then total interest paid before the completion of construction can be claimed only after the completion of construction in 5 equal installments for 5 successive financial years starting from the year of completion of construction.
2. If loan taken for repairs, renewals or reconstruction, then no tax benefit allowed on interest before the completion.

For simplicity and easy understanding see the below table.

Purpose of Home Loan	Amount allowed for deduction
Loan taken on or before April 1, 1999	30,000 /-
Loan taken after April 1, 1999 but construction not completed within 3 years	30,000/-
Loan taken for reconstruction, repairs or renewals	30,000 /-
Loan taken after April 1, 1999 and the property is self-occupied	2,00,000 /-
If the property is let out	No Limit

Hope this will clear some confusions about tax benefits on Interest on Home Loan.