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10 things one should know about Tax benefit on payment of Housing Loan and Interest on let-out property

Possession of the property

  • To claim the deduction of Interest payment, the house must be completed and taken possession. 
  • However, for taking tax benefit on principal, repayment can be taken from the year you start repaying the loan

Rental Income

  • To claim tax benefit on housing loan towards a property that is let out, one has to declare the rental income.
  • In case, the house is vacant, one has to offer notional rent to taxes as per the calculation of Annual Value (AV) of a Let-Out Property

Principal Repayment

  • The principal repayment towards housing loan up to Rs.1,50,000 per year  can be deducted u/s 80C of Income Tax Act from your total income.
  • Please note that the maximum deduction u/s 80C towards insurance premium, contribution to provident fund, tuition fee, housing loan repayment etc all together is limited to Rs.1,50,000

The interest paid on housing loan

  • Interest paid during the year as per the interest certificate provided by the banker can be claimed u/s 24 and
  • Interest paid during the construction (also called as pre-construction period) can be claimed in 5 equal installments from the year you take possession of the property.
  • There is no upper limit to claim the interest. For Example, if the interest paid is 3,00,000 per year, you can claim the entire interest and reduce it from the rental income  

Certificate from the banker

  • This is a very important document which one should get every year. Your banker will issue Interest certificate which contains the information about principal repayment as well as interest payment during the year.
  • Normally people obtain a provisional certificate at the beginning of the year. We suggest you obtain actual interest certificate at the end of the year.

Joint Name

  • The property must be registered in the Joint Name in order to avail the tax benefits for both the co-owners
  • Each of the co-owners (husband and wife) can avail the tax benefit of Rs.1,50,000 per year towards housing loan repayment and the entire interest paid (without any upper limit) during the  year towards interest payment.
  • Even if the housing loan is in joint name, unless the property is in joint name, each of the co-owners can’t get tax benefits. For example. The property is in wife’s name but the loan is in both husband and wife’s name. In such case, only the wife can take the tax benefit.

Loan from friends or relatives

  • You can claim the tax benefit on the interest paid to friends or relatives. You have to collect interest certificate from the person giving you the loan.
  • The principal repayment, however, is not eligible for tax benefit u/s 80C

Standard Deduction from the rental income

  • 30% of the rental income (or net Annual Value) is deductible as standard deduction. For example, the rental income is Rs.3,20,000 per year, Municipal taxes paid is Rs.20,000 and then the standard deduction is 30% (Rs.3,20,000 less Rs.20,000)

Municipal Taxes, Interest and processing fee

  • Payment of municipal taxes on can be claimed as deduction as actual payment basis. Suppose, during the Financial Year 2013-14, you pay municipal taxes for the previous two years, the entire amount can be claimed as deduction.  
  • No deduction is allowed for any processing fee or commission charged by the bank towards sanctioning housing loan
  • Interest on housing loan is deductible on ‘accrual’ basis. It can be claimed on yearly basis, even if the interest is not actually paid during the year


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About CA Prasad Chartered Accountant

CA Prasad Chartered Accountant
CA Prasad is a practicing Chartered Accountant and partner in Bangalore -based CA Firm. For further information or query, please email it to [email protected]