Food, clothing, shelter -- these are more than mere election promises, they are the basic needs of every individual. But to most, owning a home was just a dream.

The real estate boom and steadily rising capital values are now making it next to impossible for most people to fund their own homes.

The good news is that banks and financial institutions are offering aggressively competitive rates on home loans, making it possible for more people to own the home of their dreams. Many builders have tie-ups with banks or financial institutions so that prospective buyers are assured of housing loans without any hassles.

Taking a home loan serves two purposes. One, of course, is that you get to buy your own home and pay for it in easy instalments. The other is that you get several benefits under the Income Tax Act. And since these sops are what make a home loan different from other loan products, it makes sense to take a long, hard look at them.

About deductions

Under the IT Act, income is taxed under five different

heads, one of them being 'income from house property'. Income under this head is taxed based on the annual value of the property. This annual value is, in turn, based on the income earning capacity of the property.

If the property is actually let out, the rent received is the annual value of the property; if the property is not let out, a notional amount (being rent expected to be received) is considered the annual value. The annual value of one self-occupied house is taken as nil.

Certain deductions are available from the annual value of the property, while determining the income from house property. The housing loan can be taken from any source -- bank, financial institution, employer, relative or friend.

The deduction is available on an annual basis and is in respect of interest liability even though interest is not actually paid during the year. But interest paid or payable on unpaid interest amount is not available as a deduction. No deduction is allowed for any brokerage or commission paid for arranging the loan.

An employer paying any salary to his employee shall deduct tax from that amount on the basis of tax rates in force. An employee who has taken a housing loan can, at the beginning of the year, furnish details of interest payable during the year.

The employer should then deduct tax on the lesser amount after allowing deduction for the amount of interest payable. The employee should, at the end of the year, furnish a certificate from the lender, specifying the amount of interest paid or payable by him during the year.

Deduction on interest

Under Section 24, any interest paid on the money borrowed to purchase, construct, repair, renovate or reconstruct the property is allowed as a deduction. The entire amount of interest paid is allowed as deduction if the loan is taken to purchase, construct, repair, renovate or reconstruct a property that is let out.

A maximum deduction of Rs 30,000 is allowed to the tax payer in respect of interest paid if a self-occupied property is acquired, constructed, repaired, renovated or reconstructed with borrowed money.

If the loan is taken after 1 April 1999, to purchase or construct a self-occupied house, an enhanced deduction of Rs 1.5 lakh (Rs 150,000) is allowed, only if the purchase or construction is completed within a period of three years from the end of the year in which the loan is taken.

However, the enhanced deduction is available only if the loan is taken to purchase or construct a self-occupied property. If a loan is taken (even after 1 April 1999) to repair, renovate or reconstruct a self-occupied house, the maximum deduction available is Rs 30,000. Also, the enhanced deduction is allowed only if the borrower furnishes a certificate from the lender every year specifying the amount of interest payable.

The interest paid on a new loan taken to repay the original housing loan is also allowed as deduction. So, if you have a loan that was taken before 1 April 1999, it will work to your advantage to take a new loan after 1 April 1999, to repay the original loan. In this case, you can claim a tax deduction of Rs 1.5 lakh in respect of the interest paid on this new loan.

Pre-construction period

The time between the date on which loan is taken and 31 March of the year immediately before which the property is acquired or construction completed is called the pre-construction period. If the loan is repaid before the acquisition or construction is completed, then the pre-construction period ends on the date of repayment of loan.

So, if you take a loan on 1 July 2000, and construction of the house is complete by 30 January 2005, the pre-construction period is 1 July 2000 to 31 March 2004. If the loan is fully repaid on 20 December 2003, the pre-construction period is 1 July 2000, to 20 December 2003.

The interest paid or payable in the pre-construction period is not available as a deduction in the year of payment of interest but it is available as deduction in five equal instalments.

The first instalment is allowed as a deduction in the year in which construction or acquisition of the property is completed. Interest for that year and the subsequent four years plus one-fifth of the interest of the pre-construction period will be allowed as deduction.

Even in such a situation, however, the aggregate deduction for the year in case of self-occupied property cannot exceed Rs 30,000 or Rs 1.5 lakh as the case may be.

If the loan is taken by two or more persons, the deduction for interest paid is available to each co-borrower, based on the amount of loan he actually repays or is liable to repay. The same deduction limits (Rs 30,000 and Rs 1.5 lakh) apply to each co-borrower, though the aggregate deduction available to all co-borrowers can exceed Rs 30,000 or Rs 1.5 lakh as the case may be.

Very often, the borrower includes his/her spouse's name for convenience. In such cases, deduction for interest will be allowed only to the individual who has actually repaid the loan. Since the spouse has actually not paid any amount, he/she will not be eligible to get any deduction.

If a loan is taken from a Non-Resident Indian, any interest payable outside India is subject to tax deduction at source. Any interest paid or payable outside India will not be allowed as deduction if tax is not deducted at source and there is no person in India who can be treated as an agent of the non-resident.

Deduction on principal

Under Section 80C of the IT Act, deduction is available in respect of repayment of the principal amount of a loan taken to buy or construct a residential house. Under this section, a maximum deduction of Rs 1 lakh (Rs 100,000) is allowed per year.

You can also claim deduction under Section 80C towards payment made for stamp duty, registration fee and other expenses for the purpose of transferring the property in the name of the assessee. All these deductions, however, should not exceed the overall limit of Rs 1 lakh.

However, deduction under Section 80C is not available in respect of payment made towards the cost of any addition, alteration, renovation or repair carried out after the issue of the completion certificate.

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The author is a member, Bombay Chartered Accountants' Society. www.bcas.org