According to a report by the IT department, by January 10, income tax filings increased by about 5%, to 5.95 crore returns, for the fiscal year that ended on March 31, 2020. A much-awaited union budget on February 1, 2021 introduced several relief measures on products such as home loans, which is likely to push the number of filed IT returns further.

The Income Tax Act contains several provisions on which tax deductions can be claimed in a financial year. In fact, last year, in a span of three months (April to July 2020), the IT department reportedly issued refunds worth Rs.71,229 crore to over 21 lakh taxpayers.

If you are one of the prospective homebuyers looking to purchase a property in the affordable housing bracket (Tax benefits on home loan)

Essentially, the Income Tax Act provisions based on which borrowers can claim tax benefits on their home loan application are as follows.

1. Section 80C

Under provisions of section 80C of the IT Act, tax deductions of up to Rs.1.5 lakh can be claimed on the principal component repaid in a financial year.

2. Section 24B

Under section 24B, borrowers can claim up to Rs.2 lakh on accrual and interest payment.

3. Section 80EE

If a home loan was sanctioned in the financial year 2016-17, borrowers can claim an exemption of up to Rs.50,000 in a financial year on interest payment.

4. Section 80EEA

For borrowers not already benefited by Section 80EE, a deduction of Rs.1.5 lakh can be claimed on payment of interest in a financial year.

Additionally, if you continue to reside in a rented property different from the purchased property, you can claim tax benefits against the house rent allowance as well. The deduction is up to 50% for those living in metro cities and 40% for non-metro city residents.

New reliefs in the union budget in February 2021

To further boost the growth of the real estate sector amid a global economic slowdown, the much-awaited union budget 2021 saw a slew of relief measures for prospective homebuyers in the country.

Low- and middle-income groups are the ones to benefit the most as the government extended the tax exemption on affordable rental housing complexes (ARHCs) by another year till March 2022.

But what does this mean for new homebuyers?

Essentially, houses valued under Rs.45 lakh are classified in the affordable housing category. And if you are planning to buy a home under this value, you can claim an additional benefit of up to Rs.1.5 lakh under Section 80EEA of the Income Tax Act.

This exemption is over and above tax exemptions under other sections of the IT Act. So, if you do not own another property on the date of loan sanction, you can also claim tax exemption of Rs.2 lakh on home loan interests under Section 24 of the said act.

Effectively, new homebuyers can enjoy collective tax exemption of up to Rs.3.5 lakh a year, which should significantly alleviate the financial burden associated with long term home loans.

Moreover, a tax holiday extension for a year was also announced in the speech for migrant workers and developers associated with affordable housing schemes. An excerpt from the budget document states that a 100% deduction of profits and gains from real estate development activities can be claimed under Section 80-IBA of the IT Act.

However, the concerned ARHC project must be approved by a competent authority between June 1st, 2016 and March 31st, 2021.

Therefore, if you are interested in purchasing a new property in the affordable housing bracket (This will allow you to tap into the benefits of calculating EMIs before taking a home loan.

Conditions to fulfil to claim tax reliefs

The fine print of the budget document contains certain conditions that must be fulfilled if one wants to claim tax reliefs under the new regime. These conditions make up an essential part of the process of home loan sanctioning and disbursement and hence include the following:

1. These benefits are only applicable to affordable housing schemes. Meaning: stamp duty of the concerned property must not exceed Rs.45 lakh.

2. Tax exemption can only be claimed if end-use of the home loan sanctioned by financial institutes is restricted to purchase of residential properties only.

3. The home loan application must be submitted between April 1, 2021 and March 31, 2022.

4. Individual taxpayers cannot be beneficiaries of Section 80EE of the IT Act, where a deduction of Rs.50000 per financial year can be claimed on the interest component of a housing loan.

If you fulfil these conditions, you can approach a financial institution for home loans. Ideally, look for HFCs who further expedite the loan application procedure by extending pre-approved offers with minimal documentation. Such offers can be claimed on products such as home loan and loan against property. You can check your pre-approved offer by providing a few essential details, including name and contact information.

Overall, the tax benefits on home loan and holiday extension are a welcome change in the industry. Tax reliefs are most likely to boost investments in the real estate sector, thus benefiting all stakeholders associated with the affordable housing project. Reliefs introduced in the union budget are very exciting for first-time homeowners who can enjoy substantial annual savings in a financial year.