How to Save Taxes on Property Purchase On Home Loan

Posted on: Jan 24, 2022 | 3 mins | Written by: HDFC ERGO Team

How to Save Taxes on Property Purchase On Home Loan

Buying a home in India can be beneficial from a tax-saving perspective. In fact, real estate investment promises good returns in the long run. However, to receive all the benefits, you need to plan out your real estate investment well. Only then, you can make informed decisions and optimise your tax savings. That said, if you are wondering how does buying a house save on taxes, this guide is for you! Read on to find out all about tax benefits, tax savings, and GST savings on your next property purchase.

Tax Benefits of Property Purchase

Listed below are 3 income tax benefits of purchasing a new property. If you’ve been thinking about how to save tax on property purchase, this is how!

1. Income tax saving on home loan

Tax benefits on housing loans are provided under section 24, section 80C and section 80EE of the Income Tax Act, 1961. For claiming the tax benefit on a home loan, you must fulfil one essential requirement common with all the income tax sections.

You must be the bearer of both the titles, i.e., owner of the house/property and the borrower of the loan for the property. Only ownership alone or being a borrower of funds alone cannot reap these benefits. For instance, if you are thinking of buying a home in your wife’s name and paying the EMI from your income, you will not get any tax benefit.

2. Income tax deduction for home loan repayment of principal amount

You can claim a deduction for principal repayment only after the construction of the property, as per Section 80C. For instance, if the competent authority issued the construction completion certificate in March 2021, then the principal amount repaid during the financial year 2020-21 can be claimed entirely in the income tax return of that year to the extent of ₹1,50,000.

However, the principal repaid, if any, prior to FY 2020-21 cannot be claimed in the return filed for FY 2020-21. The deduction is also eligible only for the repayment of a loan borrowed to purchase or construct a house property. Hence, principal repayment of a loan borrowed for alteration, renovation, or repair doesn't qualify for claiming deduction under section 80C.

3. Income tax deduction for home loan interest

You can claim the tax benefit of interest paid on the home loan for both the pre-construction and post-construction periods. Deduction for the interest paid on the home loan can be claimed under Section 24(b) of the Income Tax Act 1961.

Interest is divided into two categories: Pre-construction/Acquisition and post-construction/Acquisition. Pre-construction period interest starts from the date of borrowing and ends on the 31st March, just before the date of completion or the date of repayment of the loan, whichever happens first. Post-construction period interest begins after completing the construction.

4. Income tax deduction for first-time home buyer

An individual is given an extra tax benefit amounting to ₹50,000 for interest paid on the home loan. The benefit of this deduction is given over and above the interest deduction taken under section 80EE. To avail of these benefits, you must be buying your first-ever home and the amount of loan shall not exceed ₹35 lakh. Also, the value of the property should not be more than ₹50 lakhs.

5. Income tax benefit on stamp duty and registration charges

You can take benefit of the stamp duty and registration charges paid at the time of purchase of a home under section 80C up to ₹1,50,000. These benefits can be claimed anytime in the year of payment irrespective of whether any loan has been acquired or deducted.

How to Save Tax on Property Purchase?

Even though real estate has historically dealt with returning outstanding profits over the long term, most buyers would prefer not to have to pay property purchase tax. There are a few clever tricks to at least lower the tax burden, even when the taxes cannot be completely abolished. Here’s how to save tax on property purchase.

1. Try Investing in Multiple Tax-Saving Instruments

To lower your taxable income, consider investing in multiple tax-saving products such as the National Savings Certificate (NSC), Public Provident Fund (PPF), and Equity-Linked Savings Scheme (ELSS).

2. Using a Home Loan to Reduce Tax

You can lower your income tax by using a house loan to purchase a property. In case you meet the eligibility requirements, you can claim income tax deductions on both the principal and interest amount under Sections 24, 80C, and 80EE of the Income Tax Act.

Additionally, if you take out a joint loan, both loan holders may deduct up to ₹1,50,000 from the principal and up to ₹2,00,000 from the interest paid within a given fiscal year.

If you have an insurance policy for home and now want to buy a home loan, you can apply for it without any hassle. Having property insurance eases the home loan process.

3. Stamp Duty Refund

The tax that must be paid on the sale agreement, (either before or on the day the property is registered), is known as the stamp duty. Making the property purchase legitimate requires paying the stamp duty. Although the tax varies state-by-state in India, generally speaking, stamp duty is assessed at 5% of the total cost of the property. It applies to both under-construction and ready-to-move-in properties.

Bonus: Registering the property under a woman's name is one of the finest strategies to receive a 2% stamp duty rebate. This tax rebate is currently available in many states, including Delhi, Haryana, Punjab, and Rajasthan.

How to Save GST on Flat Purchase?

The answer to how to save gst on flat purchase lies in the Input Tax Credit (ITC). Let’s take a look.

1. Go for Ready-to-Move Properties

If you buy a house that is still under construction, you will be subject to 5% GST. Ready-to-move-in properties, however, do not need to pay GST. In other terms, ready-to-move-in properties can help you save some money on GST in case you intend to buy a property but haven't decided which one to buy yet.

2. Determine the Cost and Type of Property

You can also save GST by determining the type and cost of the property. Since ready-to-move-in properties typically do not incur GST, people wishing to save this tax may prefer them. Moreover, under-construction properties attract an additional GST to their overall price. Hence, try determining these factors first.

3. Possible Savings via ITC

It is important to analyse the Input Tax Credit (ITC) for projects that are still under development. With the right paperwork, including a tax invoice, you as a buyer, may be able to claim Input Tax Credits and reduce your overall GST liability.

FAQs

1. How to claim tax benefits on property purchases in India?

To claim tax benefits on property purchases, you must opt for a home loan. Later, you need to claim deductions on the principal repayment and the home loan interest. Besides this, investing in different tax-saving products like the National Savings Certificate (NSC), Public Provident Fund (PPF), and Equity-Linked Savings Scheme (ELSS) can help reduce taxable income.

2. Can I claim tax benefits on my second home?

Yes. You can certainly claim tax benefits on your second home. Nonetheless, note that this may come with some limitations. The deductions are entirely limited to the interest paid on the home loan and the principal repayment. Additionally, note that the property (second home) must be used for residential purposes in order to qualify for income tax benefits.

3. Can I claim tax benefits on a property that is bought under joint ownership?

Yes. However, it comes with limitations. The deductions are limited to the proportion of each co-borrower's ownership share. It is essential to maintain specific records of ownership shares and expenses to claim deductions. Overall, this has the potential to double the tax benefits.

Conclusion

Purchasing a property in India comes with several tax benefits that can further help in reducing the financial burden of your investment. However, it is important to understand the basics. Once you get a grip on terms like property insurance, GST, and so much more, you can make informed decisions and increase your tax savings.

Needless to say, it is highly advised to consult a tax professional to ensure compliance with tax laws. Always consult a professional to maximise the tax benefits of property purchase as per your situation.

Disclaimer The above information is for illustrative purposes only. For more details, please refer to policy wordings and prospectus before concluding the sales.

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