EMI’s consist of 2 parts: The principal amount of loan & the second one being the interest on that.
A. Treatment of Principal Amount
According to the provisions of Income tax Act repayment of principal amount of loan can be claimed as exemption from total income of the assessee under section 80C. This means that total amount of EMI’s paid during the year will be bifurcated into these 2 parts i.e. principal amount & interest. The total of principal amount can be claimed as exemption. One thing to be noted here is that since the section 80C also covers other exemptions relating to LIC premiums, PPF, NSC’s etc & the maximum amount of exemption that one can claim is upto Rs.1,00,000/-. However there is no limit on amount of principal amount of loan, however the total of exemptions to be claimed under this section should not exceed Rs. 1 lakh. Assessee can claim any of the expenditure as exemption i.e. repayment of principal amount / LIC premium / PPF etc.
In other words, the assessee can claim either full amount of Rs.1 lakh from only investments in LIC / PPF etc or can claim full amount of Rs. 1 lakh from repayment of housing loan or can make any combination of investments & repayment of principal amount of loan but it is to be kept in mind that total should not exceed Rs. 1 lakh.
B. Treatment of Interest
As regards the interest part of EMI it is allowed as a deduction from a different head of income i.e. House property. Here again we will first calculate the total amount of interest paid in an year from the EMI’s paid. If the house property in respect of which loan is taken & EMI is paid is self occupied then maximum amount of deduction that one can claim (under section 24) is Rs.30,000/-. However if the assessee fulfills the following conditions then the maximum amount of deduction is Rs.1,50,000/-
- Loan is taken on or after 01/04/1999 for acquisition / construction of property.
- Property is completely acquired / constructed within 3 years of taking the loan.
It may be construed that
- Deduction in case of amount borrowed for reconstruction / repairs / renewals of house property will be Rs.30,000/-.
- Deduction in case of amount borrowed before 01/04/1999 for construction / reconstruction / repairs / renewals / purchase of house property will be Rs.30,000/-.
Note: It is to be kept in mind that above provisions will ONLY apply when the property in respect of which loan is taken or EMI is paid is SELF – OCCUPIED by the assessee & not let – out.
Note : EMI paid in respect of that house whose construction has not been commenced will still be taken for computing exemption of interest & principal amount. The amount of exemption in respect of interest will be limited to maximum of Rs.30,000/- only. In order to claim maximum deduction of Rs.1,50,000/- the house should be constructed within 3 years from the end of year in which loan was taken & such loan is taken after 01/04/1999.
Gurpreet Singh, CA