You can benefit from a tax advantage on the interest of a mortgage taken out with my father

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Question: I am considering buying a house that my dad is willing to lend me for. I will reimburse it on the basis of EMI (Principal + Interest). Can I claim deductions for this home loan? What documents do I need to submit to the income tax office to claim the interest and principal deduction?

Answer: To claim income tax deductions for the principal part included in an IME, the home loan must have been taken out with specified entities such as central or state government, any bank, including the cooperative bank, the LIC, the National Housing Bank, any housing company, any cooperative company engaged in the granting of loans for the financing of the construction of a house, your employer which is a public company or a company of public sector or university, etc. Since you plan to take out your father’s loan, you will not receive any income tax refund for any principal repayment of a home loan available under Section 80 C.

However, there is no such restriction as regards the payment of interest on the borrowed capital, so you will be able to claim the deduction of interest due until ??2 lakh in case the property is independent. In the event that the property is rented out, you can claim the full interest subject to the limitation of the maximum amount of compensation for loss of income from the property of the house with other income during the year up to ??2 lakh. Uncompensated losses during the year can be carried forward to be deducted from the home ownership income over the next 8 years. Please note that the interest you pay to your father is his income and that your father will have to include this interest on his income tax return for the year (s) concerned.

You will need a certificate from your father indicating the amount of interest payable for each year, which may be required by the income tax officer during the tax process. Additionally, you will need to conclusively prove that the borrowed money was actually used to purchase the property.

Balwant Jain is a tax and investment expert and can be reached on jainbalwant @ gmail and @jainbalwant on Twitter.com.

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