Homeowners can claim a deduction of up to Rs 2 lakh on their home loan interest, if the owner or his family resides in the house property. The same treatment applies when the house is vacant. If you have rented out the property, the entire home loan interest is allowed as a deduction.

However, your deduction on interest is limited to Rs. 30,000 instead of Rs 2 lakhs if any of the following conditions are satisfied:

Condition I 

• The loan is taken on or after 1 April 1999, and
• The purchase or construction is not completed within 5 years from the end of the FY in which loan was availed.

Condition II

• The loan is taken before 1 April 1999.

Condition III

• The loan is taken on or after 1 April 1999 for the purpose of repairs or renewal of the house property.

When is the deduction limited to Rs 30,000?

As already mentioned, if the construction of the property is not completed within 5 years, the deduction on home loan interest shall be limited to Rs. 30,000. The period of 5 years is calculated from the end of the financial year in which loan was taken. So, if the loan was taken on 30th April 2015, the construction of the property should be completed by 31st March 2021. (For years prior to FY 2016-17, the period prescribed was 3 years which got increased to 5 years in Budget 2016). Note: Interest deduction can only be claimed, starting in the financial year in which the construction of the property is completed.

How do I claim a tax deduction on a loan taken before the construction of the property is complete? 

Deduction on home loan interest cannot be claimed when the house is under construction. It can be claimed only after the construction is finished. The period from borrowing money until construction of the house is completed is called pre-construction period. Interest paid during this time can be claimed as a tax deduction in five equal instalments starting from the year in which the construction of the property is completed.

b. Tax Deduction on Principal Repayment

The deduction to claim principal repayment is available for up to Rs. 1,50,000 within the overall limit of Section 80C. Check the principal repayment amount with your lender or look at your loan instalment details.

Conditions to claim this deduction-

• The home loan must be for purchase or construction of a new house property.
• The property must not be sold in five years from the time you took possession. Doing so will add back the deduction to your income again in the year you sell.

Stamp duty and registration charges Stamp duty and registration charges and other expenses related directly to the transfer are also allowed as a deduction under Section 80C, subject to a maximum deduction amount of Rs 1.5 lakh. Claim these expenses in the same year you make the payment on them.

c. Section 80EEA – Deduction for interest paid on home loan for affordable housing

Eligibility criteria

The deduction under this section is available only to individuals. This deduction is not available to any other taxpayer. Thus, if you are a HUF, AOP, partnership firm, company, or any other kind of taxpayer, you cannot claim any benefit under this section.

Amount of deduction

A deduction for interest payments up to Rs 1,50,000 is available under Section 80EEA. This deduction is over and above the deduction of Rs 2 lakh for interest payments available under Section 24(b) of the Income Tax Act.

Read more about the deduction of Rs 2 lakh on interest on home loan here.

Therefore, taxpayers can claim a total deduction of Rs 3.5L for interest on home loan, if they meet the conditions of section 80EEA.

Other conditions

Similar to Section 80EE, in order to claim deduction under Section 80EEA, you should not own any other house property on the date of the sanction of a loan.

Conditions for claiming the deduction

• Housing loan must be taken from a financial institution or a housing finance company for buying a residential house property.
• The loan should be sanctioned during the period 1st April 2019 and 31st March 2022.
• Stamp duty value of the house property should be Rs 45 lakhs or less.
• The individual taxpayer should not be eligible to claim deduction under the existing Section 80EE.
• The taxpayer should be a first-time home buyer. The taxpayer should not own any residential house property as on the date of sanction of the loan.

Conditions with respect to the carpet area of the house property. These conditions have been specified in the memorandum to the finance bill, but not mentioned in section 80EEA:

• The carpet area of the house property should not exceed 60 square meter ( 645 sq ft) in metropolitan cities of Bengaluru, Chennai, Delhi National Capital Region (limited to Delhi, Noida, Greater Noida, Ghaziabad, Gurgaon, Faridabad), Hyderabad, Kolkata and Mumbai (whole of Mumbai Metropolitan Region)
• Carpet area should not exceed 90 square meter (968 sq ft) in any other cities or towns.
• Further, this definition will be effective for affordable real estate projects approved on or after 1 September 2019

Section 80EEA has been introduced to further extend the benefits allowed under Section 80EE for low-cost housing. Earlier, Section 80EE had been amended from time to time to allow a deduction for interest paid on housing loan for the FY 2013-14, FY 2014-15, and FY 2016-17.

The section does not specify if you need to be a Resident to be able to claim this benefit. Therefore, it can be concluded that both Resident and Non-Resident Indians can claim this deduction.

The section also does not specify if the residential house should be self-occupied to claim the deduction. So, borrowers living in rented houses can also claim this deduction. Moreover, the deduction can only be claimed by individuals for the house purchases jointly or singly. If a person jointly owns the house with a spouse and they both are paying the instalments of the loan, then both of them can claim this deduction. However, they must meet all the conditions laid down.