Home Loan Tax Benefit: 8 Ways to Avail Tax Benefits on Home Loans

Buying your own house is every individual’s dream. The Government of India provides various tax benefits on home loan In order to encourage citizens to invest in a property, under the Income Tax Act, 1961.

These benefits not only reduce your tax bill but also help in managing your cash flow better. It is important to be aware of all the home loan tax benefits as it can help you save a significant amount of your tax payments.

A home loan comprises of both principal repayment and interest payments. Both of these categories qualify for tax deductions. Principal repayment of a house loan is deductible under Sections 80C, whereas interest portion is allowed as deduction under Section 24(b) of the Income Tax Act, 1961.

Home Loan Tax Benefit

The following tax benefits apply to home loans:

Let us understand each of these sections in detail:

1. Home Loan Tax Benefits under Section 80C – repayment of Principal Amount

You are eligible to deduct a maximum claim of Rs 1,50,000 of principle payments from taxable income each year. This is applicable for both self-occupied and rental properties.

• It also include registration fees and stamp duty paid. It can only be claimed once, though.
• Property should be fully constructed in order to claim it.
• You cannot claim this deduction if you sell your home within five years of possession.
• Any claimed deduction will be reversed in the year of sale if you sell your home within five years of taking possession. Additionally, this sum will be included in your income for the year in which the house is sold.

2. Home Loan Tax Benefits under Section 24 – Payment of Interest

Interest paid on a home loan is also deductible from taxes.

• You can avail deduction on the interest paid on your home loan under section 24(b) of the Income Tax Act. For a self-occupied house, the maximum tax deduction of Rs. 2 lakh can be claimed from your gross income annually
• In the event that you own two homes, your combined tax deduction for home loans cannot exceed Rs. 2 lakhs in a fiscal year.
• If the property is rented out, there is no upper limit on how much interest you can claim. if you have let out your property on rent, the entire amount of interest paid on your home loan for purchase, construction, repair, renewal or reconstruction can be claimed as tax deduction.
• However, the loss you are permitted to claim under the Income from House Property Act is maximum Rs 2 lakhs.
• For the purpose of adjusting the income from house property, the leftover loss can be carried forward for a period of eight years.

3. TAX DEDUCTION ON INTEREST PAID FOR UNDER CONSTRUCTION PROPERTY

If you have purchase a property and it is under -construction period and you are paying the EMIs, you can claim interest on your housing loan as deduction after the construction gets completed.

• Income Tax Act, 1961 allows to claim a deduction of both the pre-construction period interest and post-construction period interest.
• Interest pertaining to pre-construction period is allowed as deduction in five equal annual installments, commencing from the year in which the construction is completed.
• Thus, total deduction available to a taxpayer under Section 24(b) on account of interest is 1/5th of interest pertaining to pre-construction period (if any) + interest pertaining to post construction period (if any).

4. Home Loan Tax Benefits under Section 80EE – Additional Deduction

Section 80EE allows Income Tax Benefit on Interest on Home Loan to first time buyers in the following events:

• This deduction will be provided only if the cost of the property acquired is not more than Rs. 50 Lakhs and the amount of the loan taken is uptoRs. 35 Lakhs.
• The loan should be sanctioned between 1st April 2016 and 31st March 2017.
• The advantage of this deduction would be possible till the time the payment of the loan continues.
• This deduction would be accessible from the financial year 2016-17 and onwards.

Suggested Read: Section 80EE: Income Tax Deduction for Interest on Home Loan

5. Home Loan Tax Benefits under Section 80EEA – Interest on Home Loan (First Time Buyers)

The interest paid on your house loan is also eligible for an additional deduction of up to Rs 1.5 lakh. You must meet the following requirements in order to qualify for the Section 80EEA home loan tax benefit:

• If you want to buy a residential house, you must take out a housing loan from a financial institution or housing finance company.
• The loan should be approved between 1st April 2019 and 31st March 2022.
• The value of stamp duty of the house property should not exceed ₹45 lakhs.
• Individual taxpayers should not be eligible to claim deductions under existing Section 80EE.
• Taxpayer should be a first-time home buyer. At the time of loan sanction, the taxpayer should not own any residential property.
• If you and your spouse own a property jointly, and both of you make loan payments, then the deduction can be claimed by both of you.
• Individuals who are resident or non-resident can take advantage of Section 80EEA.
• It is not specified in the section whether the residential house needs to be self-occupied to be eligible for the deduction. This means that despite of not having possession, deduction can be claimed under this section.

Suggested Read: Section 80EEA - Claim deduction for the interest paid on housing loan

6. Home Loan Tax Benefits under Section 24 and Section 80C – Joint Home Loans on Interest and Principal Amount Payment

When a home loan is taken out jointly, each borrower is eligible to deduct their home loan interest payments up to Rs 2 lakh under Section 24(b) and their principle repayments up to Rs 1.5 lakh under Section 80C.

• This doubles the amount of deductions available when compared to a home loan taken by a single
• However, it is necessary that both applicants complete their EMI payments and are co-owners of the home.

7. Second Home Loan Tax Benefits

If you borrow money to purchase a second house, you will be eligible for the following tax benefits:

• Tax benefits are available on payable interest according to current provisions. The total amount of interest that was paid can be claimed as deduction under the Income Tax Act, 1961.
• The government has introduced further incentives for purchasing real estate as part of the 2019 Union Budget. Earlier, only one property could be treated as self-occupied, and a second property was deemed to be let out and therefore, notional rent was calculated and taxed as income. However, after the amendment now even a second property can be considered as a self-occupied property.

8. Deduction for stamp duty and registration charges

Under Section 80C, a deduction for stamp duty and registration fees can also be claimed but only up to a total of Rs 1.5 lakh. However, it can only be deducted in the year these costs are incurred.

How to Calculate Tax Benefits on Home Loan?

Using an online calculator is the simplest way to determine your tax benefits on a home loan. Enter your home loan information, select Calculate, and a thorough tabulation will appear. The information you'll often need is:

• Loan Amount
• Tenure
• Interest Rate
• Loan Start Date
• Gross Annual Income
• Existing Deduction Under 80C/D

Conclusion

Even while a house loan has a cost, using it wisely can significantly lessen your financial load and enable you to maximise your tax savings. Other than home loans, there are many other strategies to reduce your tax liability while making savings, which will eventually raise your overall net worth. Most of these instruments can also be used to make investments, which lowers costs and increases profits. To know more, feel free to connect with our trusted financial advisors today!