How home loan EMI holiday impacts your tax-saving

Back in March the Reserve Bank of India (RBI) asked banks to provide borrowers with a loan equated monthly instalment (EMI) moratorium to reduce the financial blow from the coronavirus-induced lockdown. Lending institutions, like banks and non-banking finance companies, have been directed to give the EMI moratorium on term loans (like home loans and auto loans) and credit card dues from March 1, 2020 to May 31, 2020. This was further extended by three months till August 31, 2020.A recent survey by ET Wealth found that nearly two-third of the respondents have availed the moratorium for home loans. If you are a home loan borrower who has opted for or is planning to opt for the EMI moratorium, there is something you need to keep in mind - the impact it will have on your tax-savings. The EMI paid by you every month on a home loan consists of two components: principal repayment and interest amount. To know how much of your home loan is principal repayment and how much is interest payments, you can ask your bank to provide a home loan certificate providing the details of the same.Current income tax laws allow tax benefits on both, the principal repayment and interest paid on home loans. Borrowers can claim a deduction on the principal amount repaid of a home loan under section 80C for a maximum up to Rs 1.5 lakh in a financial year. Similarly, interest repayment is also eligible for deduction from the borrower's gross total income for a maximum of Rs 2 lakh during a financial year.So, will you have to forgo these benefits if you opt for the EMI holiday? Or will you still be able to avail these benefits? According to tax experts, even if an individual opts for the EMI moratorium, certain tax benefits still can be availed.Tax-savings on interest paymentsFor a home loan, deduction is available for interest payable under section 24 of the Income-tax Act, 1961. Dr Suresh Surana, founder, RSM India says, "If the interest is due but not paid, it shall still be available as deduction subject to the limit of Rs 2 lakh in case of self-occupied house property, whereas with respect to let out property, there is no limit on the deduction of interest payable against such rental income. However, the maximum limit on loss from a let-out property which can be set off against other heads of income cannot exceed Rs 2 lakh in a financial year. The balance loss will be carried forward to the next financial year." Since the moratorium is only a deferral for a few months and not a waiver, banks will continue to charge interest on the unpaid amount. Therefore, the interest payable on the home loan for the financial year 2020-21 will continue to accrue even for duration of the moratorium and will be deductible.Let us say you opted for the moratorium for two months during FY 2020-21 (April and May). Then the recomputed interest, which accrues during FY 2020-21, will be available as deduction subject to limits.New Delhi-based practicing chartered accountant, Sachin Vasudeva says, "The legislature uses the words 'interest payable' on loan taken with reference to the deduction and therefore the deduction should be allowed irrespective of payment of instalment as long as the interest is accruing on the said loan. Apart from section 24, the deduction can be claimed even for section 80EE and section 80EEA even if there is no outflow in terms of EMI."Section 80EE is a deduction available over and above Rs 2 lakh limit. The maximum deduction that can be availed under the section is Rs 50,000. The following conditions must be met to be able to claim a deduction:a) Value of the house should not exceed Rs 50 lakh;b) The loan amount should not exceed Rs 35 lakh;c) The loan must be sanctioned by a financial institution or housing finance company between April 1, 2016, and March 31, 2017;d) On the date of sanction of loan, no other house property must be owned by you.To give a fillip to affordable housing, the government had introduced section 80EEA for FY 2019-20, which was further extended to FY 2020-21. The maximum deduction that can be claimed is Rs 1.5 lakh in a financial year. The deduction is available over and above the Rs 2 lakh limit. To claim this deduction, the following conditions must be satisfied:a) On the date of sanction of loan, no other house property must be owned by you;b) The loan must be taken from a bank or housing finance company;c) The stamp value of a property should not exceed Rs 45 lakh.Tax-savings on principal repaymentVasudeva says, "Repayment of the principal component of the loan is allowed as a deduction on actual payment. Accordingly, if no instalment is paid, then no deduction can be claimed under section 80C of the Act."Dr Surana says, "The deduction of the principal component of housing loan would be restricted to the EMIs paid during the financial year 2020-21, restricted up to the limit of Rs 1.5 lakh under section 80C."

from Economic Times https://ift.tt/3diuy9M