Home Loan Tax Benefit: How to Save Tax on Home Loan?
Updated: Sep 28
The Income Tax Act, of 1961, provides several deductions on home loans that can significantly reduce your tax liabilities. Notably, the additional deductions applicable to the interest paid on home loans were supposed to discontinue from March 31, 2022. However, in a beneficial move for homeowners, the finance minister has extended these benefits until March 31, 2024.
Purchasing a home is a major financial decision, and most buyers rely on home loans due to the high costs involved. Although the interest on a home loan increases the total cost of purchasing a property, exploring tax-deductible benefits can lead to substantial annual savings.
This article provides you with all the information related to tax benefits on the interest paid for the home loan so that you can reduce your tax liabilities accordingly. Be it your first home or any additional property investment, these benefits might be really important in terms of financial planning and savings.
Table of Content
Tax Benefit on Home Loan
A home loan is eligible for deductions under three separate sections of the IT Act. Principal and interest are the two components of the home loan. Let's examine these areas on home loan tax benefits in more detail:
Section 80C: Deduction on principal repayment
According to Section 80C, the annual principal paid on the EMI of the home loan is deductible. A claim may be made for a maximum of Rs 1.5 lakh. However, the home property must not be sold within five years of ownership in order to be eligible for this deduction. If not, your income in the year of sale will be increased by the deduction you previously claimed.
Section 24b: Deduction for interest paid on home loan
Eligibility: This deduction is applicable if the home loan is used for the purchase or construction of a residential property.
Condition: The construction of the property must be completed within five years from the end of the fiscal year in which the loan was taken.
Deduction Limits:
Self-occupied property: Up to Rs 2 lakh per annum.
Let-out property: No upper limit on the interest deduction. However, any loss above Rs 2 lakh can be carried forward to subsequent years, under the head "Income from House Property".
Delayed construction: If construction takes longer than five years, the deduction limit for interest is reduced to Rs 30,000 per financial year.
Deduction on interest paid during the pre-construction phase
At times, people buy an under-construction property and begin paying the EMIs even before moving in. In this scenario, you can claim a deduction on the interest on the home loan only when the construction is completed. However, you can still make the most of the deduction provisions during this period.
The pre-construction interest is one type of interest that can be deducted under the Income Tax Act. In addition to the deduction you are normally entitled to take from your house property income, you may also deduct an additional amount in five equal installments beginning in the year the property is acquired or construction is finished. The maximum eligibility is still limited to Rs 2 lakh, though.
For instance, you pay interest of Rs 20,000 per month on a house loan that you obtained for construction. After two years, the house's construction was finished in 2019. Therefore, only after the construction is finished and paid for in five equal installments beginning in 2019 can you begin to claim the pre-construction interest of around Rs 2.4 lakh that you paid. The deduction on interest paid during the pre-construction phase is summarized below:
Scenario: Interest paid on a home loan for an under-construction property can also be claimed as a deduction.
Calculation: The total interest paid before the completion can be claimed in five equal installments starting from the year of completion.
Cap: The maximum deduction for pre-construction interest is also capped at Rs 2 lakh, combined with the deduction for interest paid in the year of completion.
Section 80EE: Additional Deduction
Homebuyers are eligible for an additional deduction under Section 80EE, up to a maximum of Rs 50,000. Following are the provisions of Section 80EE:
Deduction Limit: Up to Rs 50,000 annually.
Eligibility Criteria:
The property value must not exceed Rs 50 lakh.
The loan amount should be no more than Rs 35 lakh.
The loan must have been sanctioned between April 1, 2016, and March 31, 2017.
The borrower should be a first-time homeowner and not own any other property at the loan sanctioning date.
Section 80C: Deduction for stamp duty and registration charges
In addition to the principal repayment deduction, Section 80C allows for the deduction of stamp duty and registration fees, up to a total of Rs 1.5 lakh. It can only be claimed, nevertheless, in the year that these costs are spent.
Section 80EEA: Additional deduction
Budget 2019 has added an extra deduction under Section 80EEA for homebuyers, up to a maximum of Rs 1.5 lakh, to encourage the housing sector. The requirements listed below must be fulfilled to claim this deduction:
The property's stamp value is not more than Rs 45 lakh.
The loan must have been approved between April 1, 2019 and March 31, 2022 (with an extension through March 31, 2021).
The borrower is a first-time home buyer who does not own any other homes as of the loan sanction date.
If a person claims a deduction under this section, they should not be eligible to claim a deductions under Section 80EEA.
Deduction for Joint Home Loan
Co-owners benefit when it comes to joint home loans because they can deduct more money. Depending on their respective shares in the loan and the property, each co-owner may claim these deductions on their own. They must also be co-owners of the property that was borrowed to be eligible for this deduction. So, you may be able to claim a bigger tax benefit if you take out a loan jointly with your family.
Deduction for Interest on a Home Loan
You can obtain a home loan specifically for the construction or purchase of a house. However, the construction must be completed within five years from the end of the financial year in which the loan was taken. A home loan consists of two components: principal repayment and interest payment.
Under Section 24(b) of the Income Tax Act, you can claim a deduction of up to Rs. 2 lakh on the interest paid for a self-occupied property. This deduction limit has been in effect since the assessment year 2018-19.
If the property is rented out, there is no upper limit on the interest you can claim. However, the total loss under the "Income from House Property" heading, including interest deductions, is capped at Rs. 2 lakh for both self-occupied and rented properties. This deduction can be claimed from the year in which the construction of the house is completed, provided the construction is completed within the stipulated time.
Budget 2023 Updates
The 2023–2024 Union Budget maintained tax breaks for developers and homeowners. The aim is to provide further support for affordable housing. Important highlights include:
Interest discounts on loans for affordable housing will be extended through March 2024.
Up to March 2024, affordable housing developments will continue to receive tax vacations.
Putting up tax incentives for projects aimed at providing affordable rental housing to meet the housing demands of migrant workers.
Pradhan Mantri Awas Yojana was given Rs. 48,000 crores, demonstrating the government's commitment to programmes promoting affordable housing.
Tax-Saving Tips to Maximize Your Deductions on Home Loans
Here are a few tips to maximize your deductions on home loans:
Any fees a bank charges to provide its services are tax deductible and included in the loan amount. Processing fees assessed on loans are included in service charges. The bank typically charges processing costs to borrow money. Tax deductions apply to processing fees and other costs a bank imposes in order to provide its services. Section 24 of the Income Tax Act allows for the claim of this as an interest expenditure as well. Nevertheless, no amount may be deducted for commission or brokerage fees paid to third parties (mostly your CAs) for arranging the loan.
Up to Rs. 1,50,000 in stamp duty and registration fees paid at the time of home purchase may be claimed under section 80C. These expenses are deductible from taxes at any point during the year of payment, regardless of whether a loan has been taken out or repaid. This is in contrast to tax deductions for principal repayment of home loans, which are only available once the house is completed.
If your spouse is an earning member and is applying for a loan, this could be a suitable tax planning strategy. When earning members apply for loans under joint names, they each enjoy benefits of up to Rs. 2 lakh under Section 24 and Rs. 1.5 lakh under Section 80C. In addition, they receive an increased credit limit based on their combined earnings. Nearly all of the revenue received is preserved. Therefore, save more money in order to earn more money.
Impact of new tax regime on Home Loan Benefits
The new tax regime aims to simplify the tax code by offering lower tax rates, but it does so at the expense of several key deductions and exemptions that were available under the old regime. Notably, under the old tax regime, taxpayers could benefit from multiple home loan-related deductions. These include Section 80C for the repayment of the principal amount of the home loan, Section 24(b) for interest on home loans, and Sections 80EE and 80EEA, which offer additional deductions on interest for first-time homeowners under certain conditions. The new regime, however, does not accommodate these deductions, impacting those who previously benefited significantly from them.
For many taxpayers, especially those with substantial home loan interest payments, the old regime may still offer more tax savings due to the considerable deductions available for home loan interest and principal repayments. The choice between the two regimes largely depends on an individual's specific financial circumstances, including their income level, the amount of home loan interest paid, and other potential deductions.
How to Claim Tax Benefits on Home Loans
Claiming tax benefits on a home loan is a crucial step in reducing your tax burden. Here’s a detailed guide on how to go about it:
1. Determine Your Eligibility: Ensure that the home loan is taken for a property registered in your name or that you are a co-owner and co-borrower. Both primary borrowers and co-borrowers can claim tax deductions.
2. Calculate Your Tax Deduction: Assess the tax deduction limits available under different sections:
Section 80C: Deduction of up to ₹1.5 lakh on principal repayment.
Section 24(b): Deduction of up to ₹2 lakh on home loan interest for self-occupied properties.
Section 80EE/80EEA: Additional deduction for first-time homebuyers, subject to conditions.
3. Obtain the Interest Certificate: Request the interest certificate from your lender. This document details the total interest paid during the financial year, which is essential for claiming deductions.
4. Submit the Interest Certificate to Your Employer: If you are a salaried individual, submit the interest certificate to your employer to reflect the deductions in your Form 16 and adjust your TDS (Tax Deducted at Source).
5. Filing Your Tax Return: If you have not submitted the interest certificate to your employer, you can still claim the deductions while filing your income tax return. Ensure you enter the correct details under the appropriate sections in your ITR form.
6. For Self-Employed Individuals: Self-employed individuals are not required to submit the certificate to any employer. However, they should retain all relevant documents, including the interest certificate and property ownership details, in case the Income Tax Department requests them during an audit.
How to Calculate Tax Benefits on a Home Loan
Calculating tax benefits on a home loan can be done easily using an online tax calculator, which helps simplify the process. Here’s what you will typically need to enter:
Loan Amount: The total sanctioned loan amount.
Tenure: The duration of the loan repayment period.
Interest Rate: The applicable interest rate on your home loan.
Loan Start Date: When you started repaying the loan.
Gross Annual Income: Your annual income before deductions.
Existing Deductions under Sections 80C/80D: Any other deductions you are already claiming under various sections of the Income Tax Act.
Once you input these details, the calculator will provide a breakdown of the tax benefits available under various sections, such as 80C, 24(b), and, if applicable, 80EE or 80EEA.
Tips for Maximizing Tax Benefits: First-time borrowers might find it difficult to navigate the complexities of home loan tax benefits. It’s advisable to consult with a tax advisor or choose a lender who can guide you on the applicable tax laws and deductions. This ensures that you fully understand how to claim all eligible tax benefits and make the most of your home loan.
FAQ
Q1. Who is eligible to claim the benefits of tax deductions on home loans?
There is a single, fundamental criterion that applies to all income tax sections in order to be eligible for the tax advantage on a house loan. You have to be the bearer of both titles—that is, the loan holder and the owner of the real estate. These benefits are not available to those who are merely owners or debtors. On the other hand, you might be a co-borrower or co-owner. Thus, if you are considering purchasing a house in your wife's name and deducting the interest from your earnings, you will regrettably not receive any tax benefits. In general, the only people eligible to claim tax benefits on a home loan are individuals or members of Hindu undivided families. No body corporation, partnership firm, or company is eligible for this deduction.
Q2. How much tax benefit can I get on a home loan?
The following is a list of the tax benefits associated with home loans according to various Income Tax Act sections:
For a self-occupied home, up to Rs 2 lakh under Section 24(b)
Up to Rs 1.5 lakh under Section 80C
Q3. Which home loan grants are available to first-time home buyers?
First-time buyers are eligible for additional deductions under section 80EE of INR 50,000 for home loan interest, section 80C for stamp duty payment, and section 24 for principal repayment and interest deduction.
Q4. Are there any tax benefits on a second home loan?
Indeed. It will be deemed self-occupied if the first residence is occupied and the second is unoccupied. In this situation, the interest paid on both homes may be written off as tax deductible. But it can't be more than Rs 2 lakh. You are required to report the rental income from the second property if it is rented out while the first is occupied by the owner. From there, you can deduct the paid municipal taxes, the interest on your house loan, and the standard deduction of 30%.
Q5. Can my spouse, when we jointly purchase a home, get an income tax deduction?
When your spouse works and has a distinct income stream, they are eligible to claim different deductions on their IT returns. Under Section 80C, you both may deduct up to Rs 1.5 lakh from your combined income. You and your spouse are each eligible to deduct up to Rs 2 lakh from the interest paid on your home loan if you own the property jointly.
Q6. Can I get tax benefits if I use a home loan to buy a property even though it's still under construction?
Tax deductions are not available until the house's construction is finished. After construction is finished, you will be able to claim the total interest paid for the time leading up to the year you take possession in five equal installments starting in the year the building is finished.
Q7. Can I claim tax benefits on a mortgage that I took out to renovate my house?
Yes, up to a maximum of Rs. 30,000 annually, tax benefits on a house loan taken out for property renovations may be claimed under Section 24 of the Income Tax Act, 1961.
Q8. How can I get my home loan's tax benefits?
The steps to obtaining home loan benefits are listed below:
Have all of your paperwork available, including proof of ownership, loan information, a bank certificate detailing the principal and interest, and receipts for paid municipal taxes.
If you are a salaried employee, provide these documents to your employer for the TDS adjustment. You are not required to turn in the paperwork to anyone if you work for yourself.
Determine how much money you make from your home.
To claim a deduction for principal repayment and interest on your home loan, file your ITR.
Q9. Who can claim tax deductions on housing loans?
Only individuals who are registered owners of the property can claim tax deductions on home loans. If the property is jointly owned and the home loan is taken jointly (for example, with a spouse), each co-owner who is also a co-borrower is eligible to claim tax deductions on the home loan interest and principal, proportionate to their share of ownership. This means both parties can claim deductions, but only up to the extent of their respective ownership in the property.
Q10. Is the Home Loan principal part of Section 80C?
Yes, the principal repayment of a home loan qualifies for deductions under Section 80C of the Income Tax Act. Individuals can claim deductions on the principal component of their housing loan repayments, with a maximum limit of Rs 1.50 lakh in a financial year.
However, tax benefits on principal repayment can only be claimed after the construction of the house is completed and possession is obtained. Any repayments made towards the principal during the construction period are not eligible for deductions under this section.
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