Often, homeowners may find themselves in a situation where their house property requires a significant overhaul. Much like constructing a house from the start of purchasing an existing property, renovation or reconstruction of a house also requires enormous amounts of money. If you’ve decided to reconstruct your house property, a housing loan is one of the most convenient solutions to meet this financial requirement.

The Income Tax Act offers tax benefits on loans taken for construction or purchase of a house property. However, what about homes that are renovated? Is there any tax benefit available for reconstruction of a house? Here’s a closer look at this scenario:

What constitutes the renovation and reconstruction of a house?

Typically, when you consider the terms “renovation” and “reconstruction,” it’s natural to think of additions or major repairs to an existing home. This could include things like adding another floor to your house, building a balcony, re-flooring the entire space, re-tiling the bathroom, or re-modelling the kitchen. However, reconstruction is not simply making these changes to an existing house. It also covers demolishing a current house and building a new one on the same plot.

Housing loans taken for this purpose are categorized as home improvement loans. Borrowers can claim certain tax deductions on repayment of these loans.

Important Point :

Furthermore, it's noteworthy that the purchase of any item falling in the consumer durables category is not included in this ambient of home improvement loans. For example, purchasing a new AC or television for the living room/bedroom does not fall under the definition of a home renovation, and you cannot claim tax rebate on home improvement loan against these expenses.

Also, luxury items such as fireplaces or a swimming pool are ideally not eligible for tax deduction.

Home Renovation Loan Tax benefits on the Interest Component

When you avail a housing loan for reconstructing your house, you’ll be charged interest at a specified rate. As per section 24 of the Income Tax Act, the interest paid on a housing loan taken for renovating or improving your house can be claimed as a deduction from your income under the head house property.

  • As per Section 24 of the Income Tax Act, 1961, home improvement loan tax exemption is applicable on the interest paid against the home improvement loan. However, this tax rebate on home improvement loans has a maximum limit of Rs 30,000 per annum. This home improvement loan tax relief shares the overall tax benefit of Rs. 2,00,000 available every year under the said section for the interest amount paid against the home loans.

    In case the house is rented out the entire interest is allowed as deduction

    Hence, if you also have an ongoing housing loan and are availing of income tax benefit on the home loan interest, then the combined limit for the tax deduction against both interest paid on the housing loans and home improvement loan is Rs 2,00,000.

    For example, if you are availing of an interest benefit of Rs. 1,80,000 on the home loan amount, and also you are paying interest on home improvement loan amounting to Rs. 30,000 then the maximum tax rebate under Section 24 of the Income Tax Act, 1961 would be limited to Rs. 2,00,000.

    Also, if a person has opted for two houses to be treated as self-occupied, the maximum deduction allowable for interest portion of improvement loan in respect of both the properties remains clubbed at Rs. 30,000 only.

    However, in case the interest is paid for home improvement of a rented house, the whole of the interest shall be allowed as deduction. In case, there is a loss under the head house property after claiming these deductions, then maximum Rs 2,00,000 loss can be claimed under the head house property.

Home Renovation Loan Tax Benefits on the Principal Component

Generally, as per the provisions of section 80C, the principal component of a housing loan can be as a deduction from the total taxable income up to a maximum of Rs. 1,50,000. This clause is only valid in case the housing loan is taken for constructing or purchasing a house property. However, if the loan is for the reconstruction of a house, the principal component cannot be claimed as a deduction.