Tax deductions on the reconstruction of a house

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, reflooring the entire space, re-tiling the bathroom, or remodelling 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 categorised as home improvement loans. Borrowers can claim certain tax deductions on repayment of these loans.

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.
  The level of deduction allowed depends on the nature of the occupancy of the house:

  • If your house is vacant or self-occupied: In case your house property is vacant or is occupied by yourself and your family, you can claim interest up to a maximum of ₹ 30,000 as a deduction.
  • If your house is rented out: If the house that’s being renovated or reconstructed has been rented out, the interest can be claimed as a deduction up to a maximum of ₹ 2,00,000.

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 ₹ 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.