Section 24(b) Explained
Section 24(b) of the Income Tax Act offers a significant benefit for homeowners: the ability to claim deductions on the interest paid on home loans. When
you borrow from your parents to buy a house, the interest you pay to them is also eligible for this deduction. However, there's a limit. You can claim a deduction of up to ₹2 lakh for the interest paid in a financial year. This is a substantial saving, effectively reducing your taxable income and, consequently, your tax liability. It's crucial to understand that this deduction applies only to the interest component of your loan payments. Make sure you keep a detailed record of all payments, including interest, for tax filing purposes. This includes the loan agreement with your parents, payment receipts and any other relevant documentation that supports the loan transaction and interest paid.
Principal Repayment Rules
While the interest component enjoys the benefit of Section 24(b) deduction, the principal amount you repay to your parents is treated differently for tax purposes. You cannot claim a deduction under Section 80C for the principal repayment. Section 80C usually allows deductions for certain investments and expenses, such as principal repayment on home loans from financial institutions, but it doesn't extend to the principal repayment made to family members like your parents. Therefore, you won't get any immediate tax benefit from the repayment of the principal amount itself. However, keep in mind that the repayment of the principal reduces your overall debt, which is a significant financial advantage in the long run. It's essential to differentiate between interest and principal components in your loan repayment schedule to understand how each is treated for tax purposes.
TDS and Loan Repayment
One of the practical aspects of borrowing from your parents is the absence of a Tax Deducted at Source (TDS) requirement. When you make interest payments to your parents, you don’t need to deduct TDS on the interest amount, which simplifies the process significantly. Furthermore, there's no need to obtain a Tax Deduction and Collection Account Number (TAN) for this purpose. This is a notable difference from loans taken from banks or other financial institutions, where TDS is generally applicable. However, while you are exempt from TDS, it's essential to report the interest paid to your parents in your Income Tax Return (ITR). You must provide details of the interest paid and claim the deduction under Section 24(b) to avail of the tax benefit. This reporting ensures transparency and compliance with tax regulations, even when the TDS is not required.
