Tax Deductions on Home Loan Repayment for NRIs

For many NRIs residing outside India, owning a property back home is an emotional and financial goal. It showcases a solid investment for the future and a connection to their roots. Considering this, often through home loans, they invest in Indian property. However, unlike residents, the income tax deductions on home loan repayments for NRIs are significantly different. 

Further, under section 80C, they can claim a deduction of up to INR 1,50,000 on principal repayment. Additionally, under section 24(b), they can claim a tax deduction of up to INR 2,00,000 on interest payments. 

Want to know more about this in detail? Read the blog and get to know more about several provisions, rules, and regulations NRIs apply while investing in real estate. 

Who Is Eligible to Claim Home Loan Tax Deductions?

According to the income tax definition, if you are an NRI and file tax returns in India, you are eligible to claim home loan tax deductions. Considering this, as per the Income Tax Act, 1961, you are considered an NRI for a financial year if you do not meet any of the following conditions:

• If an individual resides in India for 182 or more days during a financial year
• If an individual resides in India for 60 days (120 days in certain income cases) or more during a financial year. Additionally, 365 days or more during the four years preceding that financial year.

If you do not meet any of these conditions, you are considered an NRI.

Additionally, you should have a taxable income in India. It is because you can claim the tax deduction only against your taxable income. Considering this, for most NRIs who have property in India, the common source of taxable income is:

• Rental income from the house property
• Capital gains from the sale of other assets like mutual funds, property, or stocks.
• Income from other sources, such as interest earned on fixed deposits or NRO bank accounts in India. 
• Salary accrued or received in India, if any. 

Also, you must file an income tax return (ITR) in India. Apart from this, you must be the owner of the property and borrower on the loan to be eligible for a tax deduction under section 80C and section 24(b). This means on the title deed of the property, your name should be mentioned as the owner or co-owner, and on the loan agreement as a borrower or co-borrower.

Further, in case there are co-owners and co-borrowers, the tax benefits will be divided among all co-borrowers in the same ratio as their share in the home loan. Considering this, each co-borrower can independently claim their deduction share against their taxable income in India up to the prescribed limit. 

This was all about who is eligible to claim home loan tax deductions. Moving ahead, let's know the interest deduction on home loan under section 24(b). 

Interest Deduction on Home Loan Under Section 24(b)

Through section 24(b) of the Income Tax Act, 1961, NRIs who have bought property through a home loan in India can claim tax deductions. This section specifically applies to a tax deduction on the interest paid on housing loans. Under this:

• You can claim up to INR 2,00,000 tax deduction on paid home loan interest. This tax deduction can be applicable to both self-occupied and vacant residential properties. 
• Additionally, in the case of rented or let-out residential properties, there is no cap available on tax deduction.

Further, section 24(b) tax deduction on home loan repayments for NRIs is applicable on:

• Home loans taken on or after 1 April 1999. 
• Properties whose construction or acquisition is completed within five years from the end of the financial year in which you took the home loan. 

Additionally, the interest deduction on borrowed capital can be up to INR 30,000, if:

• If an individual has taken before 1 April 1999 for constructing or buying a house property.
• If the home loan is availed on or after 1 April 1999 for renewing, reconstituting, or repairing of a house property.
• If the home loan is availed on or after 1 April 1999, however, within five years, house construction was not completed.

This was all about interest deduction on home loan under section 24(b) of the Income Tax Act, 1961. Moving further, now let's know about the principal repayment deduction under section 80C. 

Principal Repayment Deduction Under Section 80C

Principal repayment tax deduction available under section 80C of the Income Tax Act is as follows:

• Under this, you can claim a tax deduction of up to INR 1,50,000 on the paid amount as the repayment of your home loan. It may include registration fees and stamp duty. However, they can be claimed once in the same financial year in which they were incurred.
• The home loan should have been taken to construct or buy a new house. 

Additionally, if you sell the house property within five years of its purchase, all the availed tax benefits under section 80C will be reversed. Also, the amount will be counted as your income for the year in which you sell it. Apart from this, under the new tax regime, you cannot claim tax deduction on principal repayments. 

So this was all about the principal repayment deduction available under section 80C of the Income Tax Act. Moving ahead, let's know the other tax deductions available to NRIs in India. 

Tax Deductions Available to NRIs 

Apart from tax deductions on home loan repayments, NRIs can also claim all the deductions available to a resident parent's insurance from income from an Indian house property. They can claim a deduction towards paid property taxes and interest on home loans. 

• Section 80D: For health insurance premiums paid for self, parents (under 60 years), spouse, and dependent children, an NRI can claim a tax deduction of up to INR 25,000. 
• Section 80E: Interest paid on education loans for higher studies without any cap for up to 8 years is fully deductible.
• Section 80G: Donations made to specified relief funds or charitable institutions, depending on the institution, qualify for a tax deduction of 50% or 100%. 
• Section 80TTA: On interest earned from savings accounts held with banks, cooperative societies, or post offices in India, NRIs can claim a tax deduction of up to INR 10,000.

Additionally, for both Indian residents and NRIs, the Indian government offers an extra benefit when you purchase a second house through a loan. Considering this, if you bought your first home through a loan and now you are planning to purchase a second home also on loan, you can avail of additional tax benefits. 

Further, with no specific cap on it, on your entire payable interest amount, you can claim tax benefits. While you need to pay tax on the income that your earned from your second home, for instance, rental income. However, by showing it as self-occupied, you can claim the tax exemptions. 

These are the other tax deductions available for NRIs under different sections. Moving further, let's know how NRIs can save on tax home loan interest when filing ITR. 

How NRIs Can Save Tax on Home Loan Interest When Filing ITR?

Here is how NRIs can save tax on home loan interest:

Step 1: Gather All the Required Documents

For claiming tax benefits, it is vital to have proper documentation by your side. Considering this, before starting to file your ITR, make sure you have the following documents:

• Home Loan Interest Certificate: It is the most important document when claiming tax benefits on home loan interest. You can get this from your bank or financial institution from which you take loan. They will provide you with an annual statement that clearly mentions your total paid EMI into principal and interest components for the financial year. 
• Ownership Proof: Have a photocopy of the sale deed, possession letter, or allotment letter to prove your property ownership.
• Income Proof: If you have rented out your property, have a rental agreement. Also, gather bank statements or other papers that show your taxable income in India.
• Receipts for Registration and Stamp Duty: If you are claiming these expenses in the first year when you take the loan, keep these receipts by your side.  

Step 2: Calculate Your Total Deductions

Once you get your loan certificate from where you obtain the home loan, calculate your total paid interest and principal amount during the financial year. Considering this:

• Calculate Section 24(b) Deduction: Note the total paid interest. If the property is occupied by you for personal use, you can claim up to INR 2,00,000. If it is let out, against your rental income, you can claim the complete amount. 
• Calculate Section 80C Deduction: Note the total repaid principal amount. Your claim for this tax deduction, combined with other 80C investments. It is capped at INR 1,50,000. 

To determine your total tax deduction for that financial year, add the eligible amounts. 

Step 3: File the Correct Income Tax Return (ITR)

To claim the tax deduction successfully, it is vital to file the correct ITR form. NRIs who have income from house property in India can apply for ITR-2 and ITR-3 forms. The ITR-2 form is applicable for NRIs who do not have business income, and the ITR-3 form is for NRIs who have business income. 

Additionally, in your ITR form, fill in your rental income accurately (if any) under the "Income from House Property" schedule, and then under section 24(b), claim the tax deduction. Apart from this, the principal repayment should be stated in the relevant schedule for Chapter VI-A deductions. Further, you can file the ITR online using the income tax e-filing portal. 

This is how NRIs can save tax on their home loan interest in India. Moving ahead, let's know the key points NRIs should keep in mind when claiming tax deductions on home loans. 

Key Points NRIs Should Keep in Mind When Claiming Tax Deductions on Home Loans

NRIs should consider the following things when claiming tax deductions on loan repayment in India:

• You cannot claim late fees or penal interest on EMIs as a deduction.
• For self-occupied property, you must complete the construction of it within five years of the end of the financial year when the loan was taken. It is because the interest deduction from INR 2,00,000 reduces to INR 30,000.
• If you have taken the home loan jointly, both parties can claim the tax deductions as per their respective shares in the loan. 
• Payments of EMI should be made using funds from NRO or NRE accounts in Indian rupees. 
• You should have a taxable income in India. Additionally, to claim the tax deductions on home loan repayments, you need to file an ITR in India. 

These are some of the key points NRIs should keep in mind when claiming tax deductions on home loans in India. 

Final Thoughts

Lastly, tax deductions on home loan repayment for NRIs are a powerful tool to reduce their tax burden. However, to claim these tax benefits, it is vital to have taxable income, you should be both owner and borrower, and you must file ITR in India. Considering this, on interest payment under section 24(b), you can claim up to INR 2,00,000, and under section 80C, you can claim up to INR 1,50,000 on your principal repayment.

Further, if you are facing issues in fulfilling your tax obligations in India, connect with Savetaxs. Our team of financial experts will resolve all your tax issues and help you file your taxes in India on time with complete accuracy.