Understanding tax benefit of home loans

Thursday 15th March, 2018

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Understanding tax benefit of home loans
Rishabh Parakh
As you all are aware that a taxpayer can claim the deduction towards his or her home loan EMIs which consists of principal and interest both. In this article, I am demystifying the tax benefit on your home loan interest. Tax benefit on your home loan interest comes under section 24b and applies to properties you have purchased whether for a residential or as an investment. Let us understand in detail how this benefit is calculated
? What is the maximum amount of interest deduction?
The maximum amount which you can claim as a deduction from your other taxable income i.e. say salary is Rs 2 lakh per annum. But if you would have given your property on rent then there is no limit to the amount of interest you can claim against your rental income but there is a limit of Rs 2 lakh against setting off that interest against your salary
or other income.
? What is the Impact of this Rs 2 lakh limit?
Let's take an example of Milan, who earns a salary of Rs 14 lakh for the financial year 2016-17 i.e. the assessment year 2017-18 and financial year 2017-18 i.e. the assessment year 2018-19. He owns two houses:
Property A - Using it as a self-occupied and for this house, he pays an interest of Rs 2.8 lakh
Property B - He has rented it out for Rs 5 lakh annually and pays interest of Rs 6.50 lakhs
He has also invested in a mutual funds ELSS for Rs 1.5 lakh and NPS of Rs. 50,000.
Tax benefits for joint homeowners:
In our above example, assume that Milan is married to Anjali and both of them are the joint owners of their both the properties. In this scenario, the benefit of interest as a co-borrower will be given to both of them individually to an extent of Rs 2,00,000 each which is a huge benefit in case Milan would have purchased both the properties in his name only It has to be applied in the same ratio as what they have for their ownership share in respective properties.

Particulars AY 2017-18 AY 2018-19
Property A (self-occupied)
Annual Value Nil Nil
(-) Interest on home loan (Maximum Limit) 2,00,000 2,00,000
Loss from House Property (A) (2,00,000) (2,00,000)
Property B (let out)
Annual Value (Rent) 5,00,000 5,00,000
Less: Standard Deduction @30% 1,50,000 1,50,000
Less: Interest on home loan 6,50,000 6,50,000
Loss from House Property (B) (3,00,000) (3,00,000)
Total income from house property to be set off against other income source for e.g. salary (A+B) (5,00,000) 2,00,000*
'Restricted, the balance loss of Rs 3 lakh can be carried forward for the next eight assessment years

Particulars AY 2017-18 AY 2018-19
Salary income 14,00,000 14,00,000
Income from house property (#) (5,00,000) (2,00,000)
Gross Total Income 9,00,000 12,00,000
Deductions under 80C & NPS (?l.50k + 50K) 2,00,000 2,00,000
Taxable income 7,00,000 10,00,000
Tax on the above 65,000 1,12,500
Approximate Additional tax what Milan has to pay (for the Assessment Year 2018-19 due to Rs 2 lakh maximum limit) 47, 500/-
tComputation of Income from House Property