The good news is that Finance Ministry has recently clarified that Income Tax benefits on home loans may be retained in the proposed Income Tax Code and that such contentious issues will be considered after taking the opinion of all aggrieved parties.

Now that the sops are expected to be retained in the new tax regime also, which will be effective from April 2011, let us try to maximise the IT benefits on home loan repayments. Four important income tax concessions are:

Under Section 24 of the IT Act, 1961, interest paid on home loan up to Rs. 150,000 is set off as loss from income, for self-occupied property. For rented out property, entire interest paid is deductible from total income after appropriating the rental income.

Under Section 80C of IT Act 1961, home loan borrowers can claim deduction up to Rs. 100,000 from total income on the loan (principal amount) repaid during the year along with specified saving instruments.

The entire PEMI interest amount the interest paid on home loan during the construction period is allowed as a deduction under Sec. 24 of IT Act, equally over five years (20 per cent of total interest paid), starting from the year in which the construction is completed.

Under Section 80C, along with other specified savings and home loan repaid, the amount spent for stamp paper and registration cost on registering house property up to Rs. 100,000 is deductible from total income. These tax deductions can be claimed separately by all co-owners of the property.

Couples with independent income must purchase property in joint names with distinguished share of ownership. This will help them to get a higher loan amount.

How it works

Here is an illustration. During 2008, Veena Rao, an executive working in an MNC and earning Rs. 550,000 per annum Rs. 45,800 per month approximately thought of purchasing a house for Rs. 40 lakh. She was eligible for a loan of Rs. 25 lakh only, but along with her husband as co-applicant who had a monthly salary of Rs. 37,500 as a college lecturer, she was eligible for a loan of Rs. 35 lakh.

In the first year of the loan period of Veena Rao and her husband as shown in the table, the total EMI amount paid was Rs. 451,344, out of which the lender certified that interest charged was Rs. 345,224 and principal, Rs. 106,120. As per the ownership share. Veena interest portion 55 per cent came to Rs. 189,873 and for her spouse 45 per cent, it was Rs. 155,351. Both claimed deduction up to Rs. 150,000 under Sec. 24 of IT Act.

Under Sec 80C, Mrs. Veena and Mr. Rao could claim deduction of Rs. 58,366 and Rs. 47,754 respectively towards the share of principal loan amount repaid during the year.

As Mrs. Veena had to spend Rs. 336,000 plus incidental charges for registering the property and Rs. 4 lakh towards interiors of the house acquired, she and her husband could not save any amount that qualify under Sec 80C except for the Provident Fund (PF), which was deducted from their salaries The stamp duty and fee spent on registering the property helped the two to claim deduction upto full limit of Rs. 100,000 under Sec 80C.

Before computing IT deductions for home loan repayment, the IT payable for Mrs. Veena was Rs. 69,010, as per the rate for the assessment year 2009-10. And after claiming deductions on home loans, the tax payable got reduced to Rs. 12,360, enabling a saving of Rs. 56,650.

Rao could claim deduction of Rs. 150,000 towards interest and Rs.100, 000 towards principal loan repaid, stamp duty and registration fee spent along with his PF, and he could save Rs. 41,200.

If Veena had opted for a loan on her income alone, the family would have lost the opportunity of income tax savings of more than Rs. 40,000.

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