Wrong Tax Deduction on Home Loan Can Result in Tax Penalties

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Wrong Tax Deduction on Home Loan Can Result in Tax Penalties

The purchase of a house, by taking out a home loan, is considered good by personal finance experts, who generally scoff at long-term liabilities.

A house, unlike other personal goods such as cars, is considered to be an asset. There's tax benefit too. Home buyers can claim an exemption of up to Rs. 1.50 lakh on principal payments for home loan under Section 80C of the Income Tax Act.

Buyers can avail Rs. 2 lakh deduction paid towards interest component of home loan per year.

The above-mentioned benefits apply for self-occupied properties and not for under construction houses. Further, in case of a delayed possession, the tax benefits get reduced substantially. Many a times, tax payers - unaware of this provision - claim full tax benefits on their home loan and get notices from the tax department.

According to Section 24B of Income Tax Act, a person can claim a tax deduction of up to Rs. 2 lakh on the interest paid on a self-occupied house if the possession of the property is done within three years of taking the loan.

In case the possession is given after three years, then the amount of deduction is reduced to Rs. 30,000 per year.

This means in case of delayed possession (when houses are delivered three years after a home loan has been taken), buyers can claim only Rs. 30,000 (15 per cent of the current allowed deduction of Rs. 2 lakh) as exemption.

Those who unknowingly claim exemption can get into serious trouble and may have to pay huge penalties, experts say.

"If the home buyer in such cases still claims interest of Rs. 2 lakh per annum, the tax office could disallow the deduction of Rs. 1.7 lakh per annum which could result in additional tax and interest payable by the home buyer to the tax office. At their discretion the tax office can also levy penalty for claiming excessive deduction," says Parizad Sirwalla, National Head-Global Mobility Services-Tax, KPMG.

The penalty in this case may range between 100 per cent and 300 per cent of the extra tax deductions claimed, says Amit Maheshwari, managing partner of Ashok Maheshwary & Associates.

Tax experts say that home buyers are getting tax notices for claiming over Rs. 30,000 deduction, despite delayed possession. "As people are getting the possession of the house which they booked five to seven years back now, tax department are scrutinising the returns and people are getting notices from the tax department for the same," says Sudhir Kaushik, chief financial officer, Taxspanner.com.

Tax experts believe that Finance Minister Arun Jaitley in the budget should relook at the tax benefits offered on home loans. "It may be worthwhile to consider an amendment in the provision not limiting such deduction to Rs. 30,000 per annum in cases where the delay in completion of construction is caused on account of reasons beyond the control of the home buyer," says Parizad of KPMG.

Tapati Ghosh, partner at Deloitte Haskins & Sells, said: "One of the measures that could be considered is the extension of time limit to 5 years at least for the under-construction properties."

The purchase of a house, by taking out a home loan, is considered good by personal finance experts, who generally scoff at long-term liabilities.

A house, unlike other personal goods such as cars, is considered to be an asset. There's tax benefit too. Home buyers can claim an exemption of up to Rs. 1.50 lakh on principal payments for home loan under Section 80C of the Income Tax Act.

Buyers can avail Rs. 2 lakh deduction paid towards interest component of home loan per year.

The above-mentioned benefits apply for self-occupied properties and not for under construction houses. Further, in case of a delayed possession, the tax benefits get reduced substantially. Many a times, tax payers - unaware of this provision - claim full tax benefits on their home loan and get notices from the tax department.

According to Section 24B of Income Tax Act, a person can claim a tax deduction of up to Rs. 2 lakh on the interest paid on a self-occupied house if the possession of the property is done within three years of taking the loan.

In case the possession is given after three years, then the amount of deduction is reduced to Rs. 30,000 per year.

This means in case of delayed possession (when houses are delivered three years after a home loan has been taken), buyers can claim only Rs. 30,000 (15 per cent of the current allowed deduction of Rs. 2 lakh) as exemption.

Those who unknowingly claim exemption can get into serious trouble and may have to pay huge penalties, experts say.

"If the home buyer in such cases still claims interest of Rs. 2 lakh per annum, the tax office could disallow the deduction of Rs. 1.7 lakh per annum which could result in additional tax and interest payable by the home buyer to the tax office. At their discretion the tax office can also levy penalty for claiming excessive deduction," says Parizad Sirwalla, National Head-Global Mobility Services-Tax, KPMG.

The penalty in this case may range between 100 per cent and 300 per cent of the extra tax deductions claimed, says Amit Maheshwari, managing partner of Ashok Maheshwary & Associates.

Tax experts say that home buyers are getting tax notices for claiming over Rs. 30,000 deduction, despite delayed possession. "As people are getting the possession of the house which they booked five to seven years back now, tax department are scrutinising the returns and people are getting notices from the tax department for the same," says Sudhir Kaushik, chief financial officer, Taxspanner.com.

Tax experts believe that Finance Minister Arun Jaitley in the budget should relook at the tax benefits offered on home loans. "It may be worthwhile to consider an amendment in the provision not limiting such deduction to Rs. 30,000 per annum in cases where the delay in completion of construction is caused on account of reasons beyond the control of the home buyer," says Parizad of KPMG.

Tapati Ghosh, partner at Deloitte Haskins & Sells, said: "One of the measures that could be considered is the extension of time limit to 5 years at least for the under-construction properties."



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