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Tax benefits of taking a home loan
Source: The Times of India Nov 27, 2013
Interest paid on home loan is allowed as deduction u/s 24(b) of the Income Tax Act while calculating income from house property. If the house is self occupied, the maximum amount of deduction is Rs 1,50,000. However, if the property is rented out, total interest paid on the home loan is allowed as deduction without any limit. Deduction for interest component is allowed only from the financial year in which the possession of the house property has been obtained. Interest paid for the financial year(s) prior to the financial year in which possession is obtained, is allowed in five equal annual installment from the Financial Year in which possession is obtained.

Moreover, repayment of the principal component of loan is allowed as deduction up to Rs 1,00,000 u/s 80C from the gross total income.

The budget 2013-14 has introduced tax incentive in the form of deduction of interest paid to financial institution up to Rs 1 lakh u/s 80EE from the gross total income. Deduction is available subject to following conditions:

Assessee should not own any residential house on the date of sanction of loan.

Amount of loan should not exceed Rs 25 lakh.
Loan should be sanctioned during Financial Year 2013-14.
Value of house property should not exceed Rs 40 lakh.
Taxation of Long Term Capital Gains and Short Term Capital Gains
LTCG is computed after doing indexation of cost using Cost Inflation Index (CII). However, benefit of indexation is not available while calculating STCG.

Example: Tax on Long Term Capital Gains on transfer of house property
If a house property is owned for more than 36 months, asset is long term capital asset. For calculating LTCG, cost of house property is increased to take into account the inflation factor using Cost Inflation Index notified by the Central Government. For example if A purchases a house in the financial year 2005-06 for Rs 65 lakh and sells it in the financial year 2013-14 for Rs 1.5 crore then tax on capital gain will be calculated as follows:

Sale Consideration: 1,50,00,000- Cost (65,00,000*939/497) 1,22,80,684
Tax @ 20% 5,43,863
Education Cess @ 3% 16,316
Tax Payable 5,60,179
939 and 497 are CIIs of FY 2013-14 and FY 2005-06 respectively.

Tax on capital gain can be saved by making an investment in a residential property or in bonds notified by the government for which deduction is available u/s 54 and 54EC respectively, subject to the conditions mentioned therein.

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