Tax benefits on buying and selling a house

Even though WiFi has become a necessity that we can’t live without in these times, the Roti-Kapda-Makaan trinity remains the eternal Indian dream. Within it, the dream to own a house is a dream that most of us strive very hard to fulfill. All of us want a house of our own, which we can turn into a home. We work hard and save harder to make this dream come true. And to aid our endeavours, we take home loans as well.

It is estimated that a majority of Indians have a home loan. But unfortunately, not everyone who takes a home loan understands the tax benefits that they can claim on the loan. These benefits can reduce your tax burden in a major way. Let’s understand how.

Tax benefits when a house is bought on loan

Deduction on home loan interest

You can claim tax deduction under Section 24 of up to Rs 2 lakh on home loan interest if you or your family reside in the property or even if the house is vacant. In case you have rented out the house, you can claim deduction on the entire home loan interest. These deductions are subject to certain conditions, but they can help reduce your tax outgo.

Deduction on principal repayment

Tax deduction on repaying the home loan principal can be claimed under Section 80C. The limit here will be the 80C limit of Rs 1.5 lakh. To claim this deduction, the home loan must be for the purchase or construction of a new property. But if you sell the property within 5 years of possession, deductions claimed earlier will be added back to your income.

Deduction for first-time homeowners

Under the newly-added Section 80EE, first-time homeowners can claim tax deductions of up to Rs 1 lakh. This is applicable if the home loan does not exceed Rs 25 lakh and the property value does not exceed Rs 40 lakh. The house does not have to be self-occupied to claim this deduction.

Deduction for joint home loan

If you have a home loan that is jointly owned with a family member, you can both claim tax deductions on interest of up to Rs 2 lakh each. Furthermore, both co-borrowers can also claim deductions under Section 80C for home loan repayment and transfer charges. To avail these deductions, you have to be an owner in the property for which the joint home loan has been taken.

Other deductions on house purchase

You can also claim deduction under Section 80C on the stamp duty and registration charges as well as other expenses directly related to the transfer of property.

Saving tax when a house is sold

These were the tax benefits that you can avail if you take a home loan to buy a house. But what about the time when you sell a house? There are ways to save tax even on the income you earn by selling a house.

A house is a capital asset and any gains from the sale of a house are subject to income tax. When a house is sold, there are certain expenses incurred that can be claimed as tax deductions. These expenses include brokerage or commission, stamp paper costs and traveling expenses in connection with the transfer.

Capital gains exemption on sale of house property

Over and above these expenses, you can claim exemption under Section 54 when the capital gains from the sale of a property are reinvested into buying another property. To avail this exemption, the new house has to be purchased one year before the sale or two years after the sale. When the gains have been reinvested in the construction of the property, the exemption can be claimed if the construction is completed within 3 years of the sale.

Be it a purchase or sale of a house, it is an important decision that involves a good amount of taxation. It is best to use these benefits and deductions to save taxes when the transaction is made.

This article was published in Money Today on 7 September 2016.

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