Saturday, October 12, 2019

5 Tax Benefits of taking NRI home loans in India

Many NRIs buy property in India by taking NRI home loans, 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 NRI home loans 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 NRI home loans.

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.

In general, the tax benefits of home loans are same for both resident and NRI taxpayers. The principle amount deduction under section 24, interest amount deduction paid under section 80C and additional 50K deduction under section 80EE, which is applicable from the financial year 2016-17 are available to both residents and NRI taxpayers.

Tax deduction and exemption of NRI home loans in India

The NRI home loan 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 NRI home loan
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.

Btw, the limit is only for self-occupied property and now increased from 3 to 5 years from financial years 2016-17.

For example, your total taxable income in India is 5 lakh INR including interest income, any salary income and others and you paid 3 lakh as interest on your NRI home loan than your net taxable income will be 5 lakh - 2 lakh = 3 lakh. Hence, you only need to pay tax on 50K because 2.5 lakh is basic exemption limit.

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 are only available to first-time buyers under section 80EE. The additional deduction is 50,000 INR and only be available in following scenarios

1) The property price is less than 50 lacs and loan taken is less than 35 lakhs
2) This is only available for FY 2016-17, which means loan should be given between 1st April 2016 to 31st March 2017.
3) 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 NRI home loans. 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.

5 Tax Benefits of taking NRI home loans in India

Some important points to quickly recap the article

1) You are only eligible for tax benefits if you pay income tax in India i.e. you have additional income in India e.g. rental, dividend or others. Since It's not mandatory for NRIs to file income tax in India and you may not be paying, but think about it for future income e.g. rental income from your house in future.

2) If you don't have any income in India then you don't need to pay any income tax.

3) Deduction of up to 2 lakh INR is allowed from your taxable income towards the interest payment of your NRI home loan for a self-occupied property.

4) If it's not a self-occupied property, there is no limit on deduction i.e if you paid 3 lakh INR as interest on your home loan you can deduct all of them from your taxable income.

5) The deduction on interest payment reduced to 30,000 from 2 lakh if the house is not acquired or constructed within 3 years of taking a home loan. This is now increased to 5 years from FYI 2016-17 and only applicable for self-occupied property.

6) If you are not living in the house because you are living somewhere else due to your employment e.g. NRI, the maximum limit is still 2 lakh INR and not unlimited as in the case of rented house.

7) The deduction on interest paid for a home loan is available under section 24.

8) You must file income tax returns in India to claim any tax benefits of NRI home loans.

9) You can claim up to 1.5 lakh INR on the principle component of EMI under section 80C.

10) You can claim additional 50K on interest paid on EMI if you are a first-time buyer and took the loan in FY 2016-17.

11) You can also claim stamp duty and registration charges paid under section 80C.

That's all about the tax benefits of taking NRI home loans for buying properties in India. Though you can see that you have a lot of tax benefits by buying a property by taking a home loan, I would advise you to keep your loan amount as low as possible because loans are debt and debt can never be an earning or income source. If you are living abroad and can pay your home loan, do so immediately. Another important point is that tax benefit is only available if you really have an income in India, if you don't then it's no use for you, hence paying your home loan even if it means paying foreclosure charges it's worth because interest rate on home loan is always higher than fixed deposit but 2 to 3%.

Other NRI Income tax articles you may like

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  1. Get answers to frequently asked questions on home loans eligibility,interest rates, EMI's, mortgages, home loan tax benefit and pre-payment of home loan.

  2. Hi Javin,

    As pointed in point 4 and 6. Do you recommend renting out the property, to get additional cash as well as better tax benefits?

    Also, we get tax deductions in USA for your mortgage interest. Just to be clear, you cannot claim same loan in two countries right? Can you highlight that point too.

    Thanks in advance.

  3. I am paying interest of 2 lakh and have rental income 1 lakh. can balance 1 lakah can carry forward as loss