Due to the coronavirus pandemic gripping the world so gravely, the economic conditions of most people are far from ideal. In these times, managing term loans such as home loans can be extremely challenging. Recognizing these problems, the government and the apex bank RBI has given borrowers temporary relief in the form of a moratorium on term loans.
Since home loans involve significant tax benefits according to the Income Tax Act, a moratorium must have brought confusion for you. If you want to learn more about how the temporary moratorium offered by the government will impact your taxes for this financial year, read on!
How EMI Moratorium Affects Tax Deductions
Before you understand the home loan moratorium effect on tax exemptions, it is essential to know how your home loan makes you eligible for tax deductions. In the Income Tax Act, there are two sections that deal with these deductions.
- Section 24
This section is concerned with the tax deduction on the home loan interest rate. Under it, you can claim a maximum deduction of Rs. 2 lakhs on interest repayments.
- Section 80C
Section 80C of the Income Tax Act deals with exemptions on the principal amount repayment. The upper limit of the deductions under this Section is capped at Rs. 1.5 lakh.
If you are availing of EMI moratorium, home loan tax deductions mentioned above may or may not be affected.
- Even while your home loan is on a moratorium, the interest accrues on it normally, which means that even if you don’t have to make repayments for the next few months, you will have to pay interest of all those months later. Therefore, tax deductions on interest repayments will remain as they are, even during the moratorium period. Moreover, if you were not exhausting your tax-deductible limit of Rs. 2 lakhs before the moratorium began, the increased interest payments can help you reach it.
- Under Section 80C, tax deductions are allowed only on actual repayments of the loan. Understand it this way: if you have availed EMI moratorium, home loan tax deductions under this Section, will not work because, during the moratorium period, you are not making any actual principal amount repayments. This means that your existing home loan tax benefits will reduce in this financial year if you have availed of a moratorium on your home loan. You might not be able to reach the maximum deductible limit of Rs. 1.5 lakh.
Understanding these home loan moratorium effects on tax exemptions will help you plan your finances for the rest of the year and file taxes appropriately.