Owning a house is a dream for many individuals, and with the availability of housing loans, this dream has become more attainable than ever. Apart from the joy of owning a home, there are certain financial benefits associated with housing loans, one of them being the deduction on housing loan interest in your Income Tax Return (ITR). By properly reflecting your housing loan interest in your ITR, you can potentially save a significant amount of money on your tax liability.
In this comprehensive guide, we will walk you through the essential steps and considerations to ensure that you accurately show your housing loan interest in your ITR.
Claiming Housing Loan Interest Deduction: Required Steps and Calculating Income
Step 1: Required Documents for Claiming Housing Loan Interest Deduction
- Property Ownership Details: To claim the deduction, you must be the owner of the property. If you are a co-owner, determine your share, as the deduction amount depends on your ownership percentage.
- Completion of construction or purchase date – The deduction on housing loan interest can be claimed starting from the year in which the construction of the property is completed. If you have incurred interest during the pre-construction period, you can also claim it. Pre-construction interest can be availed by dividing it into five equal installments, commencing from either the year of the purchase or the year when construction is completed.
- Borrower Details: The housing loan should be in your name to qualify for the deduction. Alternatively, you can be a co-borrower on the loan.
- Bank Certificate: Obtain a certificate from the bank that provides the details of the interest and principal amounts paid.
- Municipal Taxes Paid: Keep in mind that municipal taxes can be deducted from house property income only if they have been paid within the same year.
Step 2: Provide Documents to Your Employer or Estimate Advance Tax Liability
- Informing Your Employer: If you are claiming a deduction on home loan interest, it is important to inform your employer so they can adjust your Tax Deducted at Source (TDS) accordingly. By doing so, you can avoid the need to wait until the end of the year to determine your tax liability and make necessary tax adjustments. Make sure to communicate this information to your employer.
- Freelancers or Self-Employed Individuals: If you work as a freelancer or are self-employed, you do not need to submit these documents to any specific authority. However, you will require these documents to estimate your Advance Tax liability for each quarter. This will ensure that you are making timely tax payments and staying compliant with your tax obligations.
- No Submission to the Income Tax Department: It is important to note that you are not required to submit these documents to the Income Tax Department directly. These documents primarily serve the purpose of informing your employer or assisting in estimating your Advance Tax liability.
Step 3: Calculating Income from House Property
- Gross Value of the Property: For a self-occupied property, the gross value is considered as nil. In the case of a rented property, it is the rental value.
- Deduct Municipal Taxes: Subtract the amount of municipal taxes actually paid from the gross value.
- Apply Standard Deduction: Calculate the standard deduction, which is 30% of the Net Annual Value (gross value minus municipal taxes).
- Deduct Home Loan Interest: Subtract the interest paid on your home loan from the resulting value.
The remaining amount will be your income from the house property.
Let’s take an example to understand this better-
Consider a let-out property with an annual rental value of Rs. 6 lakh. Municipal taxes paid for the property amount to Rs. 60,000, and the interest paid on the home loan during the year is Rs. 2.5 lakh.
Calculation: Gross Value of Property: Rs. 6,00,000 Deduct Municipal Taxes: Rs. 60,000 Net Annual Value: Rs. 5,40,000 Apply Standard Deduction (30% of Net Annual Value): Rs. 1,62,000 Deduct Home Loan Interest: Rs. 2,50,000
Income from House Property: Net Annual Value – Standard Deduction – Home Loan Interest Rs. 5,40,000 – Rs. 1,62,000 – Rs. 2,50,000 = Rs. 1,28,000
In this example, the calculated income from the house property is Rs. 1,28,000, indicating a positive income. This amount will be considered for tax purposes, and you may need to pay tax on this income depending on your overall tax situation.
Step 4: Claiming Deduction for Home Loan Interest and Principal Repayment under Section 80C
If you have made principal repayments on your home loan during the year (refer to your loan installment details), you can claim a deduction for both the interest on the home loan and the principal repayment under section 80C of the Income Tax Act.
However, it’s important to note that the total deduction allowed under section 80C is capped at Rs. 1,50,000. This means that the combined amount of principal repayment and other eligible investments/expense deductions under section 80C cannot exceed this limit.
By properly identifying and documenting your principal repayments, you can optimize your tax savings by utilizing the deduction available under section 80C while staying within the prescribed limit of Rs. 1,50,000.
How to Declare Home Loan Interest on Your Income Tax Return?
- Visit the official income tax website and download the appropriate income tax return form based on your eligibility.
- Fill in your personal details like name, address, Aadhaar number, etc.
- Enter your income under the head salaries, referring to Form 16 for accurate information.
- Indicate if the property is self-occupied and provide the home loan interest payable.
- Report any income from other sources, such as interest income from deposits or investments.
- Calculate the Gross Total Income (GTI) by adding up all your income sources.
- Claim eligible tax deductions, such as those under Section 80C or 80D, and calculate the total deductions (D1).
- Compute the total taxable income by subtracting the total deductions (D1) from the Gross Total Income (GTI).
- Provide the necessary bank account details as required in the form.
Accurately showing housing loan interest in your Income Tax Return (ITR) is crucial for maximizing tax benefits. By following the necessary steps, such as gathering required documents, informing your employer, calculating income from house property, and claiming deductions under section 80C, you can ensure that you are properly reflecting your housing loan interest in your ITR.