What are the tax benefits of taking a Home Loan?

Owning a house is every individual’s dream. To encourage citizens to invest in a property, the Government provides various tax benefits on a Home Loan under the Income Tax Act of 1961. It is important to be aware of all the home loan tax benefits, as they can help you save a significant amount of your tax payments.

A Home Loan comprises both principal and interest repayments. Tax benefits on Home Loans can be availed. Section 80C allows you to claim up to Rs. 1.5 lakh as tax deduction on principal repayment. Section 24(b) lets you claim tax deduction of up to Rs. 2 lakh on the interest paid. Finally, Section 26 read with Section 24 allows tax deduction of up to Rs. 2 lakh respectively for each Joint Home Loan applicant.

Section 80C

Under section 80C of the Income Tax Act, tax deduction of a maximum amount of up to Rs. 1.5 lakh can be availed per financial year on the principal repayment portion of the EMI. This deduction towards Home Loan tax benefits in India can only be availed after the construction of the residential house property is complete. Note: if the property is sold within 5 years from the end of the financial year in which possession of such property is obtained, this benefit will be reversed.
Tax deduction under Section 80C of the Income Tax Act can be claimed for stamp duty and registration fees as well but it must be within the overall limit of Rs 1.5 lakh applied to principal repayment. This benefit can be availed regardless of whether you take a new home loan or not. Furthermore, this benefit can only be availed in the year these expenses are incurred.

Section 24(b)

You can avail deduction on the interest paid on your Home Loan under Section 24(b) of the Income Tax Act. For self-occupied homes, the maximum deduction of Rs. 2 lakh can be claimed from your gross income annually, provided the construction/ acquisition of the house is completed within 5 years. This section is known to offer tax rebate on Housing Loan interest.
Also, in case of a self-occupied house, the Loan must be borrowed for acquisition or construction only (i.e. not for repair, renewal, reconstruction). In case the construction/acquisition period exceeds the stipulated time frame, you can claim deductions on interest of Home Loan for purchase, construction, repair, renewal or reconstruction only up to Rs. 30,000 annually. On the other hand, 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.

Sections 24(b) and 80C

If you buy an under-construction property and pay the EMIs, you can claim interest on your housing loan as deduction after the construction gets completed. Income Tax Act allows you to claim a deduction of both the pre- and post-construction period interest. Pre-construction period interest is allowed as deduction in five equal annual instalments, commencing from the year of construction. Thus, total deduction available to you under Section 24(b) on account of interest is 1/5th of interest pertaining to pre-construction period + interest pertaining to post-construction period.

Section 80EEA

Section 80EEA deduction is against interest on home loan for first time home buyers. The stamp duty of the property shall not exceed Rs. 45 lakhs. You can claim it against a Loan obtained from April 2019 to March 2022. Section 80EEA of the Income Tax Act further extends the benefits allowed for low-cost housing. It can be claimed only by individuals and non-residents.

If you are planning to apply for a Home Loan with your relative as a co-borrower, you can get some tax benefits. A Joint When a Home Loan is taken jointly, all co-borrowers can claim deductions individually. Each co-borrower can claim Rs. 1.5 lakh under Section 80C for principal repayment and Rs. 2 lakh under Section 24(b) for interest repayment. However, they must also be co-owners of the property.

In India, many homebuyers prefer buying a second home in the same or different state which they can use for varied purposes. Tax benefits on interest repayment for a second self-occupied property are capped at Rs. 2 lakh under Section 24(b). For second let-out properties, the actual interest paid can be claimed as a deduction, but the total deduction is subject to a cap of Rs. 2 lakh against loss from house property.

The tax benefits on Home Loans in India serve as a powerful tool for strategic financial planning. It eases the burden of homeownership. Thoroughly understanding them helps build long-term wealth through real estate investment. Staying informed about evolving tax laws and planning strategically aid in making the most of these incentives.