Income Tax Rules related to Properties
Tax implications of Home Loan

Both principal as well as interest paid on home loans attract tax benefits under the Income Tax Act 1965.

Principal Component: Repayment of housing loan principal amount is eligible for deduction from taxable salary income under Section 80C (along with other saving instruments such as PF, PPF, Life Insurance premium, etc.) up to a maximum ceiling of Rs.1,00,000 starting from the financial year in which the possession of the house is given.

Interest Component: Interest paid on loan after completion of construction will be deductible from income from property under Section 24

For Self-Occupied - Interest paid, upto a maximum ceiling of Rs.1,50,000, will be allowed to be deducted from taxable income
For Rented-Out Property - It will be deducted from the rental income to compute profit/loss from house property

Tax benefits on interest on housing loans are allowable only for the original loan and according to Section 24 (1), tax benefits can also be availed for a second loan taken to repay the first loan but not for subsequent loans. This means that if you have already availed of one loan to refinance the original loan and want to now avail a third loan to refinance the second loan, tax rebate on interest payments will not be permissible.

Tax implications of Home Loan in cases of Under-construction House
In cases of home loan for an under-construction house, tax benefits can be claimed only after the completion of construction.

During the period of construction, the bank/financial institution from which the loan has been taken, may disburse partial amount to the borrower/builder depending on the stage of construction of the house. In these cases, the borrower does not pay an EMI. Instead, he/she pays a pre-EMI interest. No income tax benefit can be claimed on this pre-EMI interest in the year in which it is paid.

Pre-EMI interest can be claimed in 5 equal instalments annually after the completion of the construction starting from the financial year in which the construction ends and possession of the house is delivered. This pre-EMI interest should be claimed along with the interest component of the EMI under section 24. The overall limit remains Rs. 1.5 Lakhs even in this case.

Tax Implications of a Joint Loan
If there is a joint home loan, the above mentioned tax rebates can be availed simultaneously by all assesses who are joint borrowers of that loan. The tax benefits are applied according to the proportion of the loan taken by everyone involved in the joint loan. For e.g. if the ratio of ownership is 70%:30% then the loan amount of Rs.50 lakhs will be split as Rs.35 lakhs and Rs.15 lakhs respectively and interest/principal applicable to the respective amounts will be taken into account for each individual taking the loan. Hence, by opting for a joint home loan with spouse, father/mother, one can not only enhance loan eligibility but also maximize tax rebate. To claim tax benefits in such cases, it is best to procure a home sharing agreement, detailing the ownership proportion in a stamp paper, as legal proof for ownership.

Tax Implications of selling a House: Capital Gain Tax
If a person sells a property, a capital gains tax liability arises on the profits. If the sale takes place within three year of purchase, then short-term capital gains tax liability arises which will be taxed taxed at the rate applicable to the assessee depending on the income tax slab that he/she falls in. If the sale takes place after three years, then long-term capital gains tax liability arises, which currently stands at 20%.

Exemption from Long-Term Capital Gain
Long-term capital gains are exempt from tax if:

Sale proceeds/Profit amount (after factoring in the indexation benefits) is re-invested in another house as specified under Section 54. Section 54 states an individual or HUF reinvesting the net proceeds from the sale of a house in another residential house is exempted from capital gains tax, provided the new house is purchased within 2 years after or one year prior to the date of transaction.

Capital gains (and not the total sale proceeds) are invested for a period of 3 years in specific Bonds of National Highways Authority of India or Rural Electrification Corporation Limited (Section 54 EC).

Computation of Income from House Property
The interest paid as a part of housing loan EMI is considered an expense under the head ‘Income from House Property’, and is deductible from rental income that one gets from the property. There is no ceiling prescribe din this case. The entire interest paid in that financial year can be deducted from the annual income from the property. Section 192(2B) permits Loss from House Property to be set off against the Salary Income for the purpose of determining an individual’s tax liability.

Calculation of Income from house property:
Actual rent received from property

Less: House Tax to the extent actually paid by the assessee

Balance: i.e. Annual Value

30% of the annual value
Actual Interest in respect of loan for the property

Net taxable income from house property

The income tax act gives a person who does not own a residential house a concession to purchase one when they sell a capital asset.

Section 54 F states that if someone, who does not own a residential house, re-invests the net consideration received from the sale of any capital asset in a house property, he/she will not need to pay any income tax on the gain from the sale of the capital asset. There is however a timeframe within which to re-invest the funds from the gain of the sale of the capital asset. The only condition is that the newly-acquired property should not be sold within 3 years from the date of its purchase or construction. If this condition is not satisfied, the cost of the new asset is to be reduced by the amount of long-term capital gains exempted from tax on the original asset and the difference between its sale price and the reduced cost will be chargeable as short-term capital gain earned during the year in which the new asset is sold.