written by Khatabook | August 16, 2021

Section 80EE: Home Loan Tax Incentives Under the Income Tax Act 1961

Property is always a potential investment. Unfortunately, financial factors make owning a home a battleground. For many people, buying a home is still their first dream. Purchasing a house heavily impacts the person's savings. Furthermore, the repayment and interest payments on home loans tend to scare people. However, what if taking out a home loan can get you tax benefits?

The government of India has reintroduced the home loan interest deduction section under the income tax act. Section 80EE of the Income Tax Act 1961 offers tax incentives to first-time homebuyers.

To begin with, let's look at what section 80EE is all about.

What is section 80EE of the Income Tax Act 1961? 

An individual can claim a tax deduction against a home loan's interest under section 80EE of the Income Tax Act 1961. Only residential properties are eligible for this loan.  It was first introduced in the financial year 2013-14. However, it was only available for two years. During the financial years 2013-14 and 2014-2015, individuals could claim benefits under this section only up to Rs 1 lakh.

However, during the 2016-17 financial year, the income tax act was revised to reintroduce the home loan interest deduction u/s 80EE. The quantum of deduction was also modified with the re-introduction.

These are some of the features of the deduction in the 80EE section of income tax:

  • The section 80EE deduction is on the amount paid as interest on the home loan.
  • In the financial year 2013-14 and 2014-15, the section 80EE deduction was Rs 1 lac. The deduction now amounts to Rs 50,000.
  • An individual can claim a maximum deduction of Rs 50,000 in one year.
  • This tax deduction is only available to individual taxpayers. In other words, a Hindu Undivided Family, Association of Persons, Body of individuals, trusts, or partnership firms are not eligible to claim this tax benefit.
  • The home-loan interest deduction section is only available under Sec 80EE if the loan is for residential use. The deduction of interest on borrowing will not be available if the loan is not taken for residential purposes. In other words, if the property in question is under construction, then in such a case, deduction under section 80EE income tax can not be availed.
  • It is based on a per-person basis rather than a per-property basis.

Who is eligible to claim a deduction under Section 80EE? 

To qualify for deductions under Section 80EE, a taxpayer must ensure the following:

  • Only individuals can claim deductions under Section 80EE. If you belong to a Hindu Undivided Family (HUF), an association of persons (AOP), or any other type of taxpayer, then you are ineligible to claim this benefit. 
  • The deduction is available either for properties purchased individually or jointly with others.
  • Some people purchase a house with their spouse and pay instalments for the house together. In such cases, both spouses can claim separate deductions under sec 80EE in their income tax return. 
  • The deduction is only available to first-time homeowners. Also, to purchase the property, the homeowners must have taken the home loan from an accredited financial institution.
  • Furthermore, the individual doesn't need to reside in the house for which this deduction is claimed. This deduction will be available to the individual even if they live in a rented home. 
  • Until the loan payment continues, the benefit of the deduction can be taken by the assessee.

Also Read: Claiming Deduction on Interest under Section 80TTA of Income Tax Act

Conditions for claiming a deduction under Section 80EE 

Before the taxpayer can take advantage of the section 80EE deduction limit, they need to check their eligibility. The following conditions must be met:

  • The home for which the taxpayer is claiming the deduction must be the first home the assessee is buying.
  • The value of such a house is not more than Rs 50 lakhs.
  • The home loan availed on such a house is Rs 35 lakhs or less.
  • A Housing Finance company or a financial institution has given the home loan approval for the purchase of the residential property.
  • In this section, financial institutions include banks and banking institutions implied by section 51 of the Banking Regulation Act 1949 and banking and housing finance companies.
  • The home loan taken should be for residential property only and not commercial property.
  • The assessee must not possess another house on the date of sanction or approval of the loan.
  • Loan approvals are subject to a deadline. For example, a home loan must have been approved by the company or financial institution between 1st April 2016 and 31st March 2017 to claim deductions in 2017-18.
  • The taxpayer may not claim a deduction for the same interest under any other section of the Income Tax Act after claiming a deduction for interest on a home loan under Section 80EE.

In what ways does the Income Tax Act of 1961 give taxpayers a tax benefit on home loans?

Section 24, Section 80C, and Section 80EE detail all the deductions on a home loan that an assessee can claim under the Income Tax Act 1961.

Particulars of Home loan

Maximum Amount of deduction on self-occupied property

The maximum amount of deduction on non-self occupied property

Section 24(For Interest on home loan)

Rs 200,000

No limit

Section 80EE( For Additional deduction on interest on home loan)

Rs 50,000

Rs 50,000

Section 80C(For principal amount on home loan)

Rs150,000

Rs150,000

Relation between Section 80EE and Section 24 of the Income Tax act 1961

Before going into the deductions under section 80EE, we should first consider section 24.

Section 24 of the Income Tax Act 1961

In this section of the Income Tax Act, the assessee, an individual paying tax or sum of money under this Act, is eligible to avail a deduction for the interest they pay on the loan amount for the purchase of the property. To obtain a deduction on the home loan, you must purchase a residential house. Alternatively, this deduction is also known as "Deductions from income from house property."

There are two types of deductions available in this section: 

  • Standard deductions and Interest on loans. The standard deduction is dealt with in section 24(a), while the interest paid on home loans is dealt with in section 24(b).
  • Section 24(b) of the Income Tax Act provides a maximum deduction of Rs 200,000 for interest paid on a home loan to obtain, acquire, repair, or construct a residential property. Previously, this amount was Rs 150,000.

Let's discuss the relationship between the two sections:

  • The assessee who meets the requirements of both sections 24(b) and 80EE can claim both deductions for the interest on the home loan. Essentially, he can avail of deductions up to Rs250,000.
  • However, the assessee must first exhaust the deduction amount of Rs200,000 available under section 24(b). Only after the first exemption has been exhausted can he claim the second exemption under section 80EE.

How to claim the deduction under section 80EE  in the Income Tax return?

Now that we understand the purpose of home loan interest deduction u/s 80EE let's talk about how to claim it on an income tax return. To claim a deduction on interest paid on a home loan, an assessee must follow the following steps:

  • First and foremost, the assessee needs to determine the amount of interest paid on the home loan during a given financial year.
  • Second, the assessee needs to take into account sections 24(b) and 80EE. If the total interest paid on the home loan exceeds Rs200,000, he can deduct Rs200,000 under section 24(b). The assessee can deduce the deduction on the excess amount under section 80EE of the Income Tax Act.
  • To claim an 80EE deduction for home loan interest, the assessee must produce a loan approval letter along with the interest certificate. The interest certificate should be properly bifurcated between principal and interest amounts. The statement should also include the amount of interest paid by the assessee during the financial year.

Let's explain this with an example-

Mr Mohan has taken out a home loan. As a monthly instalment, he pays Rs 60,000. This loan has a principal amount of Rs 40,000 and an interest amount of Rs 20,000. In one financial year, he pays a total of Rs 2,40,000 in interest. 

  • As per section 24(b), the maximum amount Mr Mohan can deduct is Rs 200,000 as interest on a home loan provided he fulfils all the requirements under the section. 
  • Assume that Mr Mohan meets all the requirements in the section. If so, he can claim Rs 200,000 as a deduction under section 24(b). 
  • To begin with, he must exhaust the Rs 200,000 limit. He can then claim the remaining balance of Rs 40,000 under section 80EE. A section 80EE benefit is in addition to section 24(b).
  • Furthermore, he can claim a deduction on the loan's principal as well. It is possible to claim a deduction on the part of Rs 480,000, but not the entire amount. Under section 80C, he will be able to deduct Rs 150,000 from his income.

What is the relationship between Section 80EE and Section 80EEA?

In the Union budget 2019, the finance minister introduced Section 80 EEA. Taxpayers, especially those in the middle-income brackets, will benefit from this section by getting further tax relief on the interest they pay on home loans. First-time homeowners will be able to purchase their homes with this monetary support. A taxpayer may claim a deduction of up to Rs150,000 on the interest they pay on a home loan under section 80 EEA. The home loan taken should be obtained from a financial institution.

Furthermore, this deduction will be available beginning in the assessment year 2020 and every subsequent year after that. A point to be noted is that the assessee claiming a deduction under sec 80EE cannot claim a deduction under section 80EEA.

Also Read: Section 44AD of Income Tax- Features & Applications

Final thoughts

After reading the above article, we hope you have a fair understanding of section 80EE and its deduction limits. One of the most important financial decisions for every individual is to buy a home. For first-time homeowners, the Income Tax authorities of India offer various tax incentives. If you have any further questions, you may reach out to your financial advisor or chartered accountant. Keep reading financial articles on Khatabook to know more about saving tax!

FAQs

1:Can Hindu undivided families claim deductions sec 80 EE?

No, the Hindu undivided families are not eligible for section 80 EE deductions. Only individuals can claim a deduction under section 80 EE.

2: Is section 80EE available on residential properties even if the assessee does not live there?

Yes, a person may claim a deduction under section 80EE for residential properties for which a loan was taken whether or not he/she resides in the property.

3: Under the Income Tax Act 1961, is it possible to claim deductions under both section 24 and section 80EE?

Yes, on fulfilment of conditions, the assessee can claim deduction on interest paid on home loans under section 24(b) and section 80EE. However, the assessee must first exhaust the deduction limit of Rs 200,000 under section 24. 

4: If a residential property is taken in a wife's name, but her husband pays the principal and interest of the home loan taken to purchase such residential property, can he claim an exemption under section 80EE?

Under section 80EE, if the property owner is not paying the interest paid on the home loan taken, then such person won't be eligible to claim the deduction.

5: Can the tax benefit under section 80EE be claimed on a second property as well?

No, the assessee can not claim the deduction on the second house. He can claim it only on the first house purchased with the home loan.

6: Can an assessee avail section 80EE deduction for construction of a house?

No, under section 80EE, the deduction for interest paid on a home loan is only available if the home loan is taken for acquiring residential house property. It is not available for the construction of the house

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