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Finance Act 2016: Tax benefits for home purchase and rent paid

[] The Finance Act 2016, has certain provisions, which will benefit individual tax payers, both, on home loan interest and rent paid. We analyse these provisions

The finance bill, was presented in the parliament on February, 29, 2016. It became a law, after receiving the president’s assent, from May 14, 2016. This Finance Act 2016, has certain provisions, which will benefit individual tax payers, vis-à-vis home loan interest and rent paid.

You are reading: Finance Act 2016: Tax benefits for home purchase and rent paid

Extension of time for completion of construction

Until now, a tax payer, who borrowed money for an under-construction property for his own residence, was eligible to claim Rs two lakhs, beginning from the year in which construction was completed and possession taken. However, to claim this tax benefit on interest u/s 24(b), construction of the house was required to be completed within three years, from the end of the financial year in which the money was borrowed, failing which, the entitlement for interest for booking an under-construction property used for self-occupation was reduced to Rs 30,000.

Read also : How to get ICICI home loan statement online?

Owing to rampant delays in construction and handing over possession by developers, beyond the three years, many tax payers were unable to avail of the full benefits. To mitigate such hardship to tax payers, the period for completion of construction, has been extended to five years, from three years.

Additional benefit for interest on home loan taken by a first-time home buyer

Under section 80EE, an individual who borrows money for the purpose of buying a house, will get an additional deduction of Rs 50,000 from his income, if certain conditions are satisfied.

The first condition for claiming this benefit, is that the individual tax payer should not own any house on the date on which the home loan is sanctioned. Secondly, the amount of home loan should not exceed Rs 35 lakhs, for a house which does not cost more than Rs 50 lakhs. Moreover, the loan should be sanctioned between April 1, 2016 and March 31, 2017.

This additional deduction of Rs 50,000 is available in respect of an under-construction property, even during its construction period, because the provision does not require that the construction of the house for which the loan is taken should be completed, unlike section 24(b) where you can start claiming the interest deduction, only from the year in which the construction is completed.

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This will be useful, for people who are buying a property for self-use and where the maximum allowable interest is restricted to Rs two lakhs, including the pre-EMI interest which you can claim in five equal annual instalments, beginning from the year of completion of construction.

Enhanced tax benefits for rent paid

Section 80GG provides for tax relief to individuals who are salaried and are not in receipt of any house rent allowance (HRA) from their employers, or are self-employed, with respect to the rent paid for any accommodation occupied by them. The deduction is allowed, only if the tax payer, or the spouse, or minor child, do not own any residential accommodation in the place where he ordinarily resides. Moreover, the tax payer should not own a residential house at any other place, which is treated as self-occupied for tax purposes.

The amount of deduction available, is the excess of rent paid over 10% of total income, subject to 25% of the total income. Earlier, the deduction was restricted to Rs 2,000 per month. This low limit failed to provide any major benefit for the tax payers, who were paying huge amounts as rent. The Finance Act 2016, has raised the ceiling from Rs 2,000 per month to Rs 5,000 per month.

(The author is a taxation and home finance expert, with 30 years’ experience)

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Category: Must Knows

Debora Berti

Università degli Studi di Firenze, IT

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