5 Tax Benefits of taking NRI home loans in India

Posted by Anurag Mishra on March 22nd, 2017

Many NRIs buy property in India by taking housing loan for NRI, but when it comes to tax saving, most of them are not sure whether they are eligible for any tax saving in India or not. They just earned in abroad and replay the home loan by their NRE/NRO account without thinking of tax deductions available under income tax law of India for home loans. Many banks, which provide housing loan for NRI e.g. ICICI, HDFC, State Bank of India, Axis bank, Federal Bank, Bank Of Baroda and other non-banking financial institution like Tata capital, LIC Housing or HDFC itself doesn't tell you anything to NRIs about how they can save taxes while paying their home loans in India.

The most important criterion is whether NRIs are eligible for tax saving in India or not, well, you would be eligible for tax saving if you pay tax in India i.e. you have some additional income in India e.g. rental income from existing property, dividend earned on stock market or interest income generated by NRO fixed deposits. If you just earned and abroad and have no income in India, you don't need to pay any income tax and hence you don't have any tax benefit of taking housing loan for NRI.

Since most of the NRIs have some investment in India and they also have some additional incomes, it makes sense to know how much tax you save by taking home loans for buying property in India and repaying them.

Tax deduction and exemption of NRI home loans in India

The housing loan for NRI is paid in Equated Monthly Installments (EMI) from NRE or NRO bank account. The EMI is comprised of two components, principal, and interest. The principle components reduce your principle and interest is the interest you pay on your remaining principle. Income tax law in India allows deduction on both principal and interest repayment of the home loan.

So, if you pay income tax in India and also have taken a home loan for buying property in India, you can avail following tax benefits to reduce your taxable income and pay fewer taxes by being in lower tax slab rate.

1) Deduction on Interest on housing loan for NRI

The section 24 of income tax allows home loan payer deduction up to 2, 00,000 INR in the interest component of EMI they pay against their home loan. Section 24 is for Income from house property and interest paid on any loan for construction, repair, renewal or reconstruction of residential house property is considered as a loss and adjusted against the income generated by that property. The maximum tax deduction under this section is 2 lakh INR for a self-occupied property.

If the house is not self-occupied i.e. it's rented then there is no limit and you can deduct all the interest paid in that financial year from your taxable income.

If the house is not self-occupied by the owner because he is living and working somewhere else e.g. in the case of NRIs then the amount of tax deduction under section 24 shall be 2, 000, 00 only.

There is one more thing you need to consider if the property is not acquired or constructed within 3 years from the end of financial year in which the home loan was taken then the interest benefit will be reduced from 2 lakh to 30,000 only. So, if your builder gives you late possession, you not only lose money on rental but also you lose money on tax saving also.

2) Deduction on Principal repayment

The EMI component which goes to principle repayment is also eligible for deduction from your taxable income under section 80C and you can claim up to 1.5 lakh in a financial year. So, you can sum up the outgo towards principle repayment and claim it under section 80C. This means you don't have to do any more tax saving investment e.g. tax saving fixed deposit, ELSS, or anything else.

If your total principal component is less than 1.5 lakh you can also pre-pay some part of your principle and make it 1.5 lakh. This will not only reduce your taxable income for this financial year but also further reduce total interest paid as your principle will go down.

3) Additional 50K Income Tax Benefit on Interest on Home Loan for First Time Buyers

This is on top of deduction available to 2 lakh on section 24 and up to 1.5 lakh on section 80C. This additional income tax benefit on interest paid on home loans is only available to first-time buyers under section 80EE. The additional deduction is 50,000 INR and only be available in following scenarios

  •         The property price is less than 50 lacs and loan taken is less than 35 lakhs
  •         This is only available for FY 2016-17, which means loan should be given between 1st           April 2016 to 31st March 2017.
  •         The benefit will continue as long as repayment of loan continues.

4) Tax deduction on the amount paid towards stamp duty and registration charges of your property

NRIs can also claim amount paid as part of stamp duty and registration charges under section 80C. This is not due to home loan but due to buying a property and you can claim that even if you have not taken any housing loan for NRI. However, you can claim only in the year you actually paid them.

5) Deduction on pre-construction interest

It's quite common for home buyers in India including NRIs to pay EMIs on pre-construction phases. Since section 24 allows you to claim up to 2 lakh on interest paid on home loan but that can only be claimed to start the financial year in which construction is completed. In this case, you can claim the entire pre-construction interest in five equal installments; however, a total deduction should not exceed Rs 2 lakh when the house is going to be self-occupied.

{Source: http://savingsfunda.blogspot.in/2017/01/5-tax-benefits-of-taking-nri-home-loans.html}

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Anurag Mishra

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Anurag Mishra
Joined: December 13th, 2016
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