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Home Loan Tax Benefits: A Complete Guide to Saving Income Tax

How To Save Income Tax On Your Home Loan?


Introduction

Acquiring a home loan not only helps you fulfill your dream of owning a house but also provides opportunities to save on taxes. The Income Tax Act, 1961, offers several provisions that can significantly enhance these benefits. In this comprehensive guide, we will explore the various tax deductions available on home loans and how you can maximize them to save money each year.

Home Loan Tax Benefit Summary

To understand the potential tax savings on your home loan, let's take a look at the key deductions available under the Income Tax Act:

Deductions Section Maximum Deduction (INR) Conditions
Principal 80C 1.5 Lakh House property should not be sold within 5 years of possession.
Interest 24b 2 Lakh The loan must be taken for the purchase/construction of a house, and the construction must be completed within 5 years from the end of the financial year in which the loan was taken.
Interest 80EE Rs.50,000 The amount of loan taken should be Rs 35 lakh or less, and the property's value does not exceed Rs 50 lakh. The home loan should be taken between 1st April 2016 to 31st March 2017.
Stamp Duty 80C 1.5 Lakh It can be claimed only in the year these expenses are incurred.
Interest 80EEA 1.5 Lakh The stamp value of the property should be Rs.45 lakh or less. The taxpayer is not eligible to claim a deduction under Section 80EE. The home loan should be taken between 1 April 2019 to 31 March 2022.

Deduction for Interest Paid on Housing Loan under Section 24

To claim a tax deduction on the interest paid on a home loan, the loan must be taken for the purchase or construction of a house. If the loan is taken for construction, it must be completed within five years from the end of the financial year in which the loan was taken.

Under Section 24, you can claim the interest paid on the home loan EMI as a deduction from your total income, with a maximum limit of Rs 2 lakh. However, from the assessment year 2018-19 onwards, the maximum deduction for interest paid on a self-occupied house property is also capped at Rs 2 lakh.

For a let-out property, there is no upper limit for claiming tax exemption on interest. This means you can claim a deduction for the entire interest paid on your home loan.

If the construction exceeds the stipulated time of 5 years, you can only claim deductions on the interest of the home loan up to Rs 30,000 for the financial year. However, the overall loss can be claimed under the head 'Income from House Property' against any other head of income, limited to Rs 2 lakh. This deduction can be claimed from the year in which the construction of the house is completed.

Deduction on Interest Paid During the Pre-construction Period

If you have bought an under-construction property and are paying EMIs, you may wonder if you can enjoy any tax benefits on the interest paid during the period between borrowing the loan and completing the construction. The answer is yes!

The Income Tax Act allows you to claim a deduction for such interest, known as pre-construction interest. You can claim this deduction in five equal installments starting from the year the property is acquired or construction is completed. However, the maximum eligibility remains capped at Rs 2 lakh.

For example, suppose you have availed a home loan for construction and pay an interest of Rs 10,000 per month. If the construction of the house was completed in 2019 after two years, you can start claiming the pre-construction interest of approximately Rs 2.4 lakh only after the construction is completed, in five equal installments starting from 2019. The maximum interest deduction under Section 24(b) is capped at Rs 2 lakh, including the current year's interest and pre-construction interest.

Please note that if your home loan is eligible for a deduction under Section 80EEA, you can claim an additional deduction of Rs 1.5 lakh. We will discuss Section 80EEA later in this article.

Deduction on Principal Repayment under Section 80C

Apart from the interest paid on the home loan, you can also claim a deduction on the principal repayment under Section 80C. The maximum amount that can be claimed under this section is up to Rs 1.5 lakh.

However, to claim this deduction, the house property should not be sold within five years of possession. If you sell the property within this period, the deduction claimed earlier will be added back to your income in the year of sale.

Deduction for Stamp Duty and Registration Charges under Section 80C

In addition to claiming the deduction for principal repayment, you can also claim a deduction for stamp duty and registration charges under Section 80C. However, this deduction falls within the overall limit of Rs 1.5 lakh.

It is important to note that this deduction can only be claimed in the year these expenses are incurred.

Additional Deduction under Section 80EE

Under Section 80EE, homebuyers can claim an additional deduction of up to Rs 50,000. To be eligible for this deduction, the following conditions must be met:

  • The amount of loan taken should be Rs 35 lakh or less, and the property's value should not exceed Rs 50 lakh.
  • The loan must have been sanctioned between 1st April 2016 to 31st March 2017.
  • On the date of loan sanction, the individual should not own any other house, making them a first-time house owner.

It is important to note that Section 80EE was reintroduced but is valid for loans sanctioned till 31st March 2017 only.

Additional Deduction under Section 80EEA

Budget 2019 introduced an additional deduction under Section 80EEA for homebuyers, allowing them to claim a maximum deduction of up to Rs 1.5 lakh.

To claim this deduction, the following conditions must be met:

  • The stamp value of the property should not exceed Rs 45 lakh.
  • The loan must have been sanctioned between 1st April 2019 to 31st March 2022 (extended from 31st March 2021).
  • On the date of loan sanction, the individual should not own any other house, making them a first-time homebuyer.
  • The individual should not be eligible to claim a deduction under Section 80EE if claiming a deduction under this section.

Deduction for a Joint Home Loan

If you have taken a joint home loan, each loan holder can claim a deduction for home loan interest up to Rs 2 lakh each and principal repayment under Section 80C up to Rs 1.5 lakh each in their tax returns.

To claim this deduction, all co-borrowers should also be co-owners of the property taken on loan. Taking a joint loan with your family can help you maximize the tax benefits and claim a larger deduction.

Frequently Asked Questions

Who can claim tax deductions on housing loans?

Only the owners of the property can claim tax deductions on home loans. If the home loan is taken jointly with a spouse, each borrower can claim a deduction on home loan interest in proportion to their ownership.

How much tax benefit can you get on a home loan?

The tax benefits on a home loan, as per different sections in the Income Tax Act, are as follows:

  • Up to Rs 2 lakh under Section 24(b) for a self-occupied home
  • Up to Rs 1.5 lakh under Section 80C

Who is eligible to claim tax deductions on home loans?

The property owner is eligible to claim tax benefits, and if the spouse is a co-borrower, they can also apply for tax deductions. In the case of a joint loan, both parties can claim tax benefits based on their respective share of the loan payments.

Are there any tax benefits on a second home loan?

Yes, there are tax benefits on a second home loan. If the first home is self-occupied and the second home is vacant, it will be considered as self-occupied. In such a case, you can claim a tax deduction on the interest paid for both houses, up to a maximum of Rs 2 lakh. When the first home is self-occupied, and the second one is given on rent, you have to declare the rental income from the second property. From there, you can deduct the standard deduction of 30%, interest on the home loan, and municipal taxes paid.

Can my spouse claim an income tax deduction when we buy the house jointly?

Yes, your spouse can claim separate deductions in their income tax returns if they are employed and have a separate source of income. Both you and your spouse can claim a deduction under Section 80C, up to Rs 1.5 lakh, from your total income. If the house is jointly owned, both of you can claim deductions up to Rs 2 lakh on the home loan interest.

How to claim tax benefits on a home loan?

To claim tax benefits on a home loan, follow these steps:

  1. Gather all the necessary documents, such as ownership documents, loan details, certificates from the bank with interest and principal details, and receipts for municipal taxes paid.
  2. Submit these documents to your employer for adjustment of TDS if you are a salaried employee. If you are self-employed, you don't have to submit the documents to anyone.
  3. Calculate the income from the house property.
  4. File your income tax return (ITR) to claim a deduction on the interest on the home loan and principal repayment.

Can I claim tax benefits if I purchase a property with a home loan, but the house is under construction?

No, you cannot claim tax deductions until the construction of the house is completed. Once the construction is completed, you can claim an aggregate of interest paid for the period before the year of taking possession in five equal installments, starting from the year in which the construction is completed.

Is there a limit to the amount of interest that I can claim as a deduction?

Yes, the maximum amount of interest that can be claimed as a deduction is Rs. 2 lakh per annum for a self-occupied property. There is no upper limit for a let-out property.

Can I claim tax benefits on a home loan taken for the renovation of a property?

Yes, you can claim tax benefits on a home loan taken for the renovation of a property under Section 24 of the Income Tax Act, 1961. The maximum limit for this deduction is Rs. 30,000 per annum.

Conclusion

Acquiring a home loan not only helps you fulfill your dream of owning a house but also provides significant tax benefits. By understanding the various deductions available under the Income Tax Act, you can make the most of these benefits and save money each year. Remember to consult with a tax professional or financial advisor for personalized advice based on your specific circumstances. Take advantage of the tax deductions and enjoy the journey of homeownership while reducing your tax liability.

author

The Tax Heaven

Mr.Vishwas Agarwal✍📊, a seasoned Chartered Accountant 📈💼 and the co-founder & CEO of THE TAX HEAVEN, brings 10 years of expertise in financial management and taxation. Specializing in ITR filing 📑🗃, GST returns 📈💼, and income tax advisory. He offers astute financial guidance and compliance solutions to individuals and businesses alike. Their passion for simplifying complex financial concepts into actionable insights empowers readers with valuable knowledge for informed decision-making. Through insightful blog content, he aims to demystify financial complexities, offering practical advice and tips to navigate the intricate world of finance and taxation.

Frequently Asked Questions

You can get home loan tax benefit under different sections like Section 80 EEA, which provides income tax benefits of up to Rs. 1.5 lakh on the home loan interests paid. These home loan tax benefits are available over and above the existing exemption of Rs. 2 lakh under Section 24(b).

According to Section 24(b) of the Income Tax Act, you can deduct the interest paid on your home loan. For a self-occupied residence, a maximum tax deduction of Rs. 2 lakh per year from your gross income is allowed, provided that the construction/acquisition of the house is completed within five years.

If you co-own a property with your spouse and apply for a home loan together, you can each claim deductions on interest under Section 24 for up to Rs. 2,00,000. Additionally, under Section 80C for principal component repayment and related deductions, each co-applicant can claim up to Rs. 1,50,000.

 

If a personal loan is used to purchase an asset like stocks, jewelry, or property, the interest can be considered part of the acquisition cost of the asset. This can lead to lower capital gains when the asset is sold, ultimately reducing your tax liability.

 

Although purchasing a home has long been seen as a good investment, tax benefits on home loans used to be limited to just one loan. However, it is now possible for an individual to claim tax benefits on two home loans.

 

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