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Is Homeowners Insurance Tax Deductible? – Essential Guide

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Homeowner’s insurance is a fairly nuanced concept, especially for Indian homeowners. We consider homeownership a sign of progress and prosperity. When you are making a home maintenance list, you are not exactly thinking about getting a home insurance policy. Most of us buy home insurance only because our home loan lender recommends us to do so. That said, you cannot deny the apparent benefits of the home owner’s insurance.

Generally, this is the insurance policy you will take if you own a home and want to secure it from possible risks. These risk factors can include natural hazards, terrorist attacks, or even theft. Depending on the policy you have taken, you might recover a reasonable degree of the damage the incident might have possibly caused in your home.

What Does a Home Insurance Policy Cover?

The common types of insurance policies for homes are – Comprehensive Coverage, Fire & Allied Perils, and Burglary Insurance. Comprehensive insurance covers your house and all the assets you have stored in the house – the décor, jewelry, furniture, electronic goods, and so on. If you want, you can also take up an independent policy that covers just the assets in your house. Fire & Allied Perils covers the natural disasters your house might be at the risk of facing. And the burglary & theft insurance covers the damages incurred from an incident of theft.

If you are filing your income tax returns as per the updated tax regime of 2020, you will not be able to claim the deductions possible on this policy. However, if you are sticking to the tax system that allows deductions, you can get the GST you pay on the home insurance policy. You can get a rebate on this. The deduction would be limited for the premiums on the insurance policy but good enough to make your cost of ownership lower. Talk to your policy advisor, chartered accountant, or employer to know more about your profile’s possible deductions.

What are Tax Deductions?

Tax Deductions are the expenses you can charge to your income, to lower the taxable income that is considered the base to calculate your tax liability. As simplistic as it may sound, that is the meaning of a deductible.

A deductible is fundamentally different from an allowance as well as tax-free income. An allowance is a cost-specific amount given generally by your employer. Some percentage of this allowance would be deductible, meaning your taxable allowance amount would get lower. Tax-free income is the income that is not taxed altogether. In several cases, the insurance money received after a person’s demise is not taxed. That would be an example of tax-free income.

Rebates are also different from deductibles, in the sense that they act as reimbursements made by the government to you, as have paid more than the fair amount in some vertical of your tax statement.

Deductions make your taxable salary lower You can claim a standard deduction of ₹50,000. For instance – assume that your gross salary in the last assessment year was ₹10 lakhs. After the standard deduction, your taxable salary becomes ₹9.5 lakhs. Lower taxable salary equals a lower payable tax.

Renting Out Your Home? Here are the Deductions You Can Claim.

If you have been renting your residential asset as a landlord, you earn what is called Income from House Property. This income is taxable and is used in calculating your net tax liability for every year. If the rent is due but not received, it gets accumulated and taxed in the year in which it is paid. If you are also providing the furniture and other goods in the house on rent, their value is also calculated with the house’s rent to get to the Composite Rent figure.

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The calculation begins with the Gross Asset Value. This is calculated using the fair market value of the rent or the actual rent you are getting, whichever is higher, on an annual scale. Then, the municipal tax you pay on it is deducted.

Under Section 24, you are also allowed to claim standard deductions of up to 30% of the Gross Asset Value, by using them for repairs & servicing. This deduction can be used, even if the actual expenses of the repairs are higher or lower than the 30% GAV benchmark.

If you have taken debt to finance the acquisition or repair of the house property, the entire interest payment is deductible. You can claim as much as ₹2,00,000 in as the standard deduction against the income from house property in a year. If your house construction or repair does not end within three years, it will fall to ₹30,000.

Tax Deductions if You Work from Home

Claiming deductions if you work from home is becoming a cause of constant search for several employees. Some companies are allowing their employees to acquire the necessary assets such as a desk, a chair, and a laptop on the company’s expense, to work from home. The tax policy to calculate the tax liability on these incremental assets is yet to be formulated with absolute precision. The pandemic has pushed several employees to go through this situation systemically.

If you are working from home as a freelancer – it is a different situation. In this case, all your earnings from freelancing are clubbed under the Income from Profession or Business header are added to your taxable income base. What can you claim as a deduction? Every expense with an invoice that you have incurred in running your business.

If you have dedicated furniture rented inside your house to run your home-office, the rent on this furniture is 100% deductible. Internet connection, hiring other freelancers, software & licensing, payment gateway charges, and depreciation on assets like computers & printers are also deductible from your Income from Business or Profession. Make sure you have an invoice for all these expenses that clearly shows the actual loss you incurred.

Deducting Losses for Income from House Property

There are two ways you can calculate and deduct the losses you have incurred on your house property. The direct approach is by calculating the interest payable on the debt you took to finance the acquisition or repair of your house property. If this interest exceeds the Net Asset Value of your house for the given year, you can take the excess payment as a loss and deduct it from your income. If you are not using it in the ongoing assessment year, you can use it for claiming deductions anytime in the next 8 years.

Ensure that the repair or construction work for which you have taken the debt gets completed in three years of your loan’s sanction date. If the construction work exceeds this date, your deductible interest expense will fall to ₹30,000 a year.

The other situation where you can claim a loss is on the actual rental income itself. If the rental income is below the fair market value that you should be getting, it’s not considered a material loss, and you still have to pay taxes on the fair market value. If there is a tenant who is paying the rent beneath the fair market value – you will have to incur the loss of rent while still paying tax on the benchmarked fair rent.

Loss due to vacancy is simple. If the house has been vacant for a few months in a given assessment year, you will not have any accrued rent for this period. Hence, by calculating the rental income only for the rest of the year, your taxable income from house property gets automatically lowered.

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You might also incur a material loss due to a natural calamity or an incident of theft in your house. Such incidents can cause erosion in the structure of your house as well as the assets you have in the house. If it is a self-occupied house, you cannot claim any deductions based on the losses you have incurred due to these two situations.

Losses attributable to such incidents might be deductible if the house has been a source of rental income for the homeowner.

Tax Breaks for Claims Insurers Won’t Fully Cover

While the homeowner’s insurance policies are quite comprehensive in nature, they cover only the most-probable events like a natural disaster or an incident of theft. Incidents like volcanic eruptions or war-instilled damages are not covered by the policy. Such incidents may result in absolute or partial damage to the property. In such cases, you might not get any coverage. Since the building or house is not covered, even its contents are out of coverage.

For such incidents, the government generally comes up with a blanket policy pertinent to the demographic most affected by the incident. These measures might be taken by the state or central government. Beyond that, there are not any clearly spelled out tax treatments in the form of deductions. You might get a lump sum payment by the government as a relief, which might be tax-free. But there is no precedent for deductibles under this scenario.

Tax Breaks for Damage & Theft When the Coverage is Denied

Let’s assume that you took the right home insurance policy that covered both natural calamities and theft incidents for your house and your assets in the house. Here, the underlying assumption is that you are using the house for rental income.

If your insurance claim on the home insurance policy is denied, you can still use the material damages of the assets in the house like the furniture and electronic goods as well as the loss of the property itself as deductions on the income from house property. Make sure you have the right documents like the FIR and the documents necessary to prove the value of the assets in the house.

In such cases, the expenses you had to incur for relocating because of theft are not deductible primarily because you were using the house for rental income and not self-occupying purposes.

Tax Breaks for Damage & Theft When the Coverage is Accepted

If your claim gets accepted, generally, the amount you get is considered to be a compensation against the losses you have incurred. The insurer will anyway reimburse you the amount only after thorough inspection, and reduction based on the depreciated value of assets if necessary. Hence, because of the absence of explicit laws stating otherwise, the proceeds from such insurance claims are considered tax-free.

If the insurance cover for your property is over ₹5 crores, and your property has been vacant for over 30 days due to Coronavirus. Make sure you get in touch with your insurer and inform them in writing about the renewal of your policy. There have been recent instances where insurers have refused claims for such properties, despite very recent renewals.

Have You Secured Your Home?

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(Note: Tax deductions are subject to the interpretation of the tax law as well as the enforcement practice of the tax body. The best person to guide you on your claimable tax deductions would be your chartered accountant. All the comments made here are based on thorough research, yet you should get the necessary professional advice before you make any assumptions.)

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