A home is not just about a roof over your head. It’s the essential factors of livelihood that offer safety and security to your family. It’s everyone’s dream to live in a beautiful house. People spend their life savings to make their dream homes. With time, some improvements and modifications might be required in your home. Sometimes, home renovation can cost out of budget. Using your savings for such a huge expense can exhaust your savings in one go.
You can get a house renovation loan to modify, refurbish, or renovate your home. The main advantage of a house renovation loan is that it allows you to do house renovations with a contemporary design and a more comfortable living space, customised as per your tastes and aesthetic preferences. These loans are similar to a house loan. While a home loan enables you to acquire a house, house renovation loans are meant to improve the home that you already own.
In this blog, Brick & Bolt discuss home improvement loans, application procedures and home renovation loan tax deductions.
Understanding Home Improvement Loans
A house improvement loan is a type of home loan used to repair or improve your house. This loan can be used for both internal and external home renovation purposes. They can include painting, whitewashing, tiling, flooring, waterproofing, plumbing, sanitary work, etc.
Procedure to Apply for a Home Improvement Loan
To get a home improvement loan, you first need to estimate how much money you’ll need for the planned renovations and submit those plans to the bank. The bank will typically provide 85-90% of the estimated cost, while you have to pay the remaining amount.
The bank’s technical team will review and approve your renovation plans and cost estimates. They will also evaluate your ability to repay the loan based on your income and other factors. Once everything is approved, the bank will give you the loan amount.
What can be Included in a Home Renovation Loan?
The income tax department says you can deduct the money you spend on home improvement loans from your taxable income. You can also deduct the amount if you pay for home improvements directly without taking a loan.
Home improvements refer to any renovation or construction work done to your existing home. This includes:
- Building a new balcony
- Extending a room
- Adding a room or floor (if you have a permit)
- Painting
- Replacing floors or tiles in the bathroom or kitchen
- Plumbing work
- Basically, any work covered under a home improvement loan
You cannot generally use a home improvement loan to buy furniture or appliances for your home, including security systems. However, if installation or construction work is required for these, the bank may approve the loan under the home improvement category.
Home Renovation Loan Tax Deductions in India
The Income Tax Act 1961 in India allows homeowners to claim tax deductions for the costs of repairing and renovating their homes. These deductions can help homeowners cover expenses related to renovations, repairs, and improvements to their homes. Understanding the requirements and deductions can help homeowners increase their tax benefits while improving their homes.
- Section 24(b) of the Income Tax Act permits deductions for the interest paid on home renovation loans. This is a major tax deduction in India. It covers loans taken for renovating, repairing, or reconstructing a home. For homes you live in, you can deduct up to Rs. 2 lakhs per year in loan interest. There is no limit on the deduction for interest on home improvement loans for rented properties or properties deemed to be rented.
- Section 80C of the Income Tax Act allows deductions for the principal repayment of home renovation loans up to Rs. 1.5 lakh per year. This includes the repayment of loans taken for building or buying a house.
To get these home renovation loan tax deductions, homeowners must use the home improvement loans only for renovating, repairing, or rebuilding their homes. To be eligible for home renovation tax benefits, the loans must be taken from banks, housing finance companies, or cooperative societies.
There are also some other sections of the Income Tax Act that allow home renovation loan tax deductions.
- Section 80EEA: Allows a discount of up to Rs. 1.5 lakh per year on the interest paid on home loans for affordable housing purchases. The value of the property for stamp duty sake must be less than or equal to Rs. 45 lakhs, and the taxpayer must not own any other residential property at the time when the home loan is approved.
To claim these home renovation loan tax deductions, homeowners must keep invoices, receipts, loan documents, and completion certificates related to the home renovation costs. Seeking personalised advice from a tax advisor or chartered accountant can help maximise the deductions and ensure compliance with tax rules and regulations. By taking benefit of these tax benefits, homeowners can improve their homes and save money on their taxes in India.
Claiming House Repairs on Taxes
The amount of deduction you can claim depends on how much ownership share you have in the property. The home loan must be taken in your name. However, if there is a co-borrower on the loan, they can also claim the deductions. You can only start claiming the home loan tax deductions from the financial year in which the construction of the house is completed.
- If you are a salaried employee, you need to submit the home loan interest certificate to your employer. This certificate shows your ownership share, borrower details, and the breakdown of your EMI payments into interest and principal amounts. Your employer will then adjust your tax deductions accordingly.
- If you don’t submit this certificate, you will have to calculate the taxes yourself and claim any refund during tax filing. You may also have to pay additional taxes if an amount is due.
- For self-employed individuals or freelancers, you don’t need to submit these documents to anyone, including the Income Tax department. However, you will need them to calculate your advance tax liability every quarter. Make sure to keep these documents safe in case of any queries from the IT department and for your own records.
Conclusion
Taking advantage of home renovation loan tax deductions can be a smart move for homeowners to renovate their houses. You can increase the tax benefits by knowing the eligibility criteria, documentation requirements, and different sections of the Income Tax Act that allow these deductions.
Remember to keep records of all expenses, loan documents, and completion certificates. Professional advice from a tax consultant or chartered accountant can also help you understand the complexities of tax laws.
Ultimately, investing in your home improves your living experience and offers potential tax savings. Through home renovation loans and the accompanying tax deductions, you can create a comfortable and customised living space and a better financial life.