Is Home Insurance Tax-Deductible?
Buying and owning a home of your own is a matter of pride for everyone. In India especially, people work hard for years to pay off their home loans. It is like a dream come true when you can finally own your own home. Fortunately, today, buying a home is more accessible with a plethora of home loans available in the market. Given the effort and sacrifice involved in paying off home loan amounts, it is no wonder that people want to take all measures to protect their homes. This protection is available in the form of home insurance. But come – time the question arises—is home insurance tax-deductible?
What is home insurance?
First, here is a rundown on what is home insurance. It is an insurance policy that covers your house and the belongings in it in case of any natural calamities such as storms or landslides and man-made disasters such as riots, thefts, and so on. So a home insurance policy insures against any loss or damage caused to the policyholder’s property.
What are the two types of home insurance policies available?
There are two types of home insurance policies available in India, they are:
1. Structure or building insurance: This type of insurance can only be purchased by a homeowner. It provides protection for any damage caused to the structure of the property including outside structures that are part of the policyholder’s property like a shed or garage.
2. Home contents insurance: This insurance type covers the policyholder’s personal belongings such as their furniture, clothes. This kind of home insurance can also be purchased by a renter and not just a homeowner.
Is home insurance tax-deductible?
In India, insurance policies such as life insurance or health insurance are tax-deductible. Here, tax-deductible means that the premiums that the policyholders pay for their insurance policies are eligible for a tax deduction. Unfortunately, this rule does not pertain to home insurance policies. So, policyholders, whether homeowners or renters, who pay home insurance premiums will not be able to claim a tax deduction on them.
However, there are a few possible exceptions depending on how the home is used. So, if certain conditions are met, home insurance could be tax-deductible.
Cases of home insurance:
There are two special cases where a policyholder can receive a tax deduction on their home insurance policy. One case is if you are using your home or part of your home for business purposes. The second case is if you are a landlord and are receiving rental income from your house.
- Case No. 1: Using the home for business purposes
Suppose you are an entrepreneur and you are using your home or a section of your home to run your business/for office purposes. You should measure the square foot of the area being used as your office workspace. Your workspace could include just one room or more. It could be an area or section of the house that is dedicated to the objective of your business. You then need to deduct this square footage being used as your office workspace from the total square foot area of your home. You may then apply this percentage amount to your home insurance premium, which results in a tax-deductible amount.Let us understand with an example:
Shefali runs a small content marketing business out of the two-bedroom flat that she owns. She uses the smaller, spare bedroom as her home office and has set up her office workspace there. She has also taken out a home insurance policy against her flat. To claim a tax deduction, Shefali calculates the square footage of her home office against the square footage of the entire flat. She estimates that the square footage of her home office is about 20% of her entire flat.
So, for Shefali, the answer to the question—is home insurance tax-deductible? The answer is, yes but with a caveat. Shefali can only claim 20% of her home insurance premiums as tax-deductible.
In order to claim a tax deduction, the area that is calculated as the office workspace must be devoted solely to the business. At the same time, policyholders who are running larger business operations from their property cannot claim a tax deduction on their home insurance. They must, instead, acquire a commercial insurance policy for their business. Another point to remember is that this is only applicable for self-employed persons and not salaried individuals even if they are working from home.
- Case No. 2: When you are a landlord receiving rental income from your house
For landlords, the answer to the question— is home insurance tax-deductible— is a resounding yes. If you are a landlord and you rent out your entire house, the rent you receive is classified as ‘income from house property. You may rent out an entire flat or even multiple flats, so here you can claim a tax deduction on the home insurance of all the rental properties.In situations where the landlord rents out not just his house but additional assets such as beds, cupboards, air conditioners, and so on. Here the rent received by the homeowner includes the cost of the assets in the house. The rent here is called composite rent.
Suppose you rent a basement of your property, the portion that is rented out is eligible for a tax deduction on the home insurance policy. So, again the tax-deductible amount is dependent on how much of the property is being rented out. If it is just one area, then the policyholder has to estimate the square footage of that area. If it is an entire house, then the policyholder gets the maximum tax deduction available under the landlord insurance policy.
Let us understand with two examples:
- Tanya rents out one room in her flat as a paying guest (PG) accommodation. She also has a home insurance policy for her flat. So is home insurance tax-deductible for Tanya? Yes, it is. Similar to Shefali, in order to claim a tax deduction, Tanya has to calculate the square foot area of the room let out on rent as well as the entire square foot area of her flat. She will then claim the percentage of the rented room as a tax deduction on her home insurance premiums.
- Megha has put her furnished one-bedroom flat on rent. While she earns income as a landlord, she also pays the premiums on her home insurance coverage. In Megha’s case, she will claim the entire rental income as tax-deductible on her home insurance.
Home insurance policies are not very popular in India, despite how valuable they are in protecting a dream come true. A home insurance policy is necessary to safeguard the investment you have made in your home, whether the danger is a fire, floods, or burglary. So, it is advisable not to ponder too hard on questions like is home insurance is tax-deductible or not. Home insurance has many more advantages than those offered by tax benefits.