A home loan helps you buy your dream house. In India, the government encourages buying homes by offering tax breaks when you pay back your loan. One big advantage of a home loan is that you can save on taxes.
According to the Income Tax Act of 1961, you can get tax deductions for your home loan. This means that each month, the interest you pay on your loan can lower your tax bill. So, even though home loans can be expensive, you can save money each year with these tax benefits. It’s important to know how to make the most of these savings!
In this article, we’ll look at the tax benefits for home loans.
Understanding Home Loan Repayment
When you take a home loan, you pay it back in monthly installments called EMIs (Equated Monthly Installments).
Each EMI has two parts:
- Principal Amount: This is the actual money you borrowed.
- Interest: This is the cost of borrowing that money.
Both of these components can help you save on taxes. Regardless of your job status, if you have a home loan, you can claim tax deductions for both the principal and interest payments.
How the New Tax Regime Affects Home Loan Benefits?
The new tax regime has changed how you can claim tax benefits for your home loan.
Here’s a simple breakdown for your easy understanding:
- If you opt to pay taxes as per the old tax regime, you can claim benefits of all tax deductions available for home loan under the income tax act.
- Under the new tax regime:
- You can’t claim tax deductions for the principal amount, stamp duty, or registration fees under section 80C.
- Deductions under sections 80EE and 80EEA are not available anymore.
- If you live in the property, you can’t claim tax deductions for interest payment under section 24(b). However, if you rent out the property, you can claim the tax deductions for interest payment under section 24(b).
Income Tax Deductions for Home Loan Interest (Section 24)
If you have a housing loan, here’s how you can claim tax deductions for the interest paid.
To claim a tax deduction, you must use the housing loan to buy or build a home. If it’s for construction, the building should be completed within five years of taking the housing loan.
You can deduct up to ₹2 lakh of interest paid on your home loan each year for a house you live in (self-occupied).This means for a self-occupied house, you can only claim up to ₹2 lakh.
Any interest over this amount cannot be claimed in future years.
If you have multiple houses self occupied, you can also claim interest on a mortgage for a second property, but the total deduction for both houses cannot exceed ₹2 lakh.
If you rent out the property, you can deduct the full amount of interest paid, there’s no limit here.
You can claim tax deductions based on what you owe for the year, even if you haven’t paid the interest yet.
Tax Deduction for Interest Paid During Pre-Construction
If you buy a house property that’s still being built and are paying the loan before moving in, you can claim a tax deduction for the interest paid during the construction period, known as pre-construction interest.
Once the construction is finished, you can divide the total pre-construction interest into five equal parts and claim this amount starting from the year the construction is completed.
The maximum deduction you can claim remains ₹2 lakh for the total interest paid in a year.
To claim tax benefits on the interest paid for a home loan, there are no restrictions on selling the property. If you sell the house within 5 years of taking possession, your previous interest deductions won’t be taxed.
To claim these benefits, you need a certificate from your bank detailing the interest and principal amounts paid for the financial year. If you’re an employee, you should provide this to your employer. Otherwise, keep it handy in case the tax officer requests it.
Example
If you took a housing loan in April 2021 and paid ₹10,000 monthly in interest, totaling ₹2.4 lakh by April 2023 (when construction finishes), you can start claiming this in five equal parts from the 2023-24 tax year.
For the year 2023-24, if you paid ₹1.2 lakh in interest, you can claim a total of ₹1.68 lakh. This includes ₹1.2 lakh for that year plus ₹48,000 (which is ₹2.4 lakh divided by 5) for the pre-construction interest.
If your housing loan qualifies under Section 80EEA, you can claim an extra ₹1.5 lakh, in addition to the ₹2 lakh limit under Section 24(b). If construction takes longer than five years, the maximum tax deduction you can claim drops to ₹30,000.
Tax Deduction on Principal Repayment (Section 80C)
You can claim a tax deduction for the principal part of your home loan payments under Section 80C. You can claim up to ₹1.5 lakh per year for the principal repayment of your home loan.
Key Points to keep in mind for tax deduction on principal repayment
- Self-Occupied Properties: If you own a second house that is either vacant or occupied by your parents, it can still be considered self-occupied and eligible for these deductions.
- Important Note: If you sell the house within five years of buying it, any deductions you claimed will be added back to your income in the year you sell. To avoid this, it’s generally advisable to hold the property for at least 5 years before selling, to minimize tax implications.
- Components of EMI: Your Equated Monthly Installments (EMIs) consist of both principal and interest. Under Section 80C, you can mainly deduct the principal portion for self-occupied properties.
- Claiming Deductions: This deduction can be claimed along with other tax-saving investments like Fixed Deposits, Provident Funds, and insurance premiums.
- Renovation Loans: If the loan is for renovations, additions, or repairs for an existing house, the principal repayment is not eligible for deduction.
Additional Costs Covered: This deduction also includes expenses like stamp duty and registration fees when you buy the house property.
Deduction under Section 80EEA
If you bought an affordable house, you might qualify for an additional tax deduction under Section 80EEA.
You can claim up to ₹1.5 lakh each year on the interest paid on your home loan. This can be added to the ₹2 lakh tax deduction allowed under Section 24, giving you a total potential tax deduction of ₹3.5 lakh in a year.
Eligibility Criteria for section 80EEA tax deduction:
- The stamp value of the property must not exceed ₹45 lakh.
- The loan must have been sanctioned between April 1, 2019, and March 31, 2022 (with some extensions possible).
- You must be a first-time home buyer and should not own any other residential property when the loan was approved.
- You cannot claim this tax deduction if you are already claiming a tax deduction under Section 80EE.
You cannot claim the same amount under both Section 24 and Section 80EEA. For example, if you paid ₹1.4 lakh in interest, you must choose to claim it either under Section 24 or Section 80EEA.
By meeting these conditions, you can take advantage of additional tax benefits when purchasing an affordable home!
Deduction under Section 80EE
Section 80EE offers a tax deduction for first-time home buyers who took out a mortgage loan during the fiscal year 2016-17.
You can claim an additional tax deduction of up to ₹50,000 on the interest paid for your home loan. This is in addition to the ₹2 lakh tax deduction available under Section 24.
Eligibility Requirements:
- The property must be residential.
- Only first-time home buyers can claim this tax deduction.
- The maximum additional benefit is ₹50,000.
- The value of the house must not exceed ₹50 lakh.
- The housing loan amount should be ₹35 lakh or less.
- The housing loan must have been sanctioned between April 1, 2016, and March 31, 2017.
If you took a house loan in FY 2016-17, you can continue to claim this deduction until the loan is fully paid off. However, this tax deduction is not available for new loans taken after April 1, 2017.
If you meet the necessary conditions, you could potentially claim a total of up to ₹5 lakh in tax deductions, i.e. ₹2 lakh under Section 24, ₹1.5 lakh under Section 80C, and ₹50,000 under Section 80EE.
If you’re planning to buy a new house, consider structuring your home loan to maximize your tax benefits!
Deduction for Joint Home Loans
When you take a home loan jointly with someone else (like a family member), both of you can benefit from tax deductions:
- Interest Deduction: Each person can claim up to ₹2 lakh for the interest paid on the home loan.
- Principal Repayment Deduction: Each person can also claim up to ₹1.5 lakh for the principal repayment under Section 80C.
- Co-Ownership Requirement: To qualify for these deductions, all house loan holders must be co-owners of the property.
Taking a joint home loan can help you maximize your tax benefits, making it a smart financial move!
Summary of Home Loan Tax Benefits:
| Deduction Type | Section | Maximum Deduction (INR) | Conditions |
| Principal Portion of Loan Repaid | 80C | Up to ₹1.5 lakh each year | The house must not be sold within 5 years of possession. Includes expenses like stamp duty and registration fees. |
| Stamp Duty, Registration Fees, etc. | 80C | ₹1.5 lakh | Can only be claimed in the year these expenses are paid. |
| Interest Incurred During the Year | 24(b) | ₹2 lakh | Deductible for self-occupied properties. Any excess over ₹2 lakh cannot be carried forward. The loan must be for buying or constructing a house, and construction must be completed within 5 years of loan approval. |
| Pre-Construction Interest | 24(b) | Included in ₹2 lakh | Allowed as a deduction once construction is completed. No limit for let-out properties. |
| Interest Incurred During the Year | 80EE | ₹50,000 | First-time buyers with loans taken in 2016-17 can claim this deduction for properties worth up to ₹50 lakh. The loan amount must be ₹35 lakh or less. |
| Interest Incurred During the Year | 80EEA | ₹1.5 lakh | Available for affordable housing. Property’s stamp value should be ₹45 lakh or less. Cannot claim Section 80EE. Loan must be taken between April 1, 2019, and March 31, 2022. |
This summary highlights the key tax benefits available for home loans, making it easier to understand how to maximize your deductions!
Loss under the Head House Property
If you own a house that you don’t rent out, you may incur a loss under the “Income from House Property” category. This can happen for a couple of reasons.
You can claim tax deductions on the interest you pay on your home loan under Section 24(b). If this interest is higher than any rental income you receive (or if the property is not rented out at all), it results in a loss.
You can offset this loss against other sources of income, but only up to ₹2 lakh in a single year.
If your total loss exceeds ₹2 lakh, you can’t use the extra loss in that year. Instead, you can carry it forward for up to 8 years and claim it against future income from house property.
This means that even if your house property isn’t generating income, you can still manage your tax liabilities effectively!
Home Loan Tips and Tax Benefits
- Joint Home Loans: If both partners are working, consider taking a joint home loan. This allows you to claim higher tax deductions—up to ₹3 lakh on the principal and ₹4 lakh on the interest combined.
- Plan Your Loan: Familiarize yourself with tax provisions to effectively reduce your taxable income and save on taxes.
- Improve Your Credit Score: Regularly paying your EMIs on time can enhance your credit score, which is beneficial for future loans.
- Smart Use of Home Loans: Use your home loan strategically to achieve your goal of home ownership while taking advantage of various tax benefits.
- Choose the Right Lender: Look for the best home loan deals from reputed lenders to maximize benefits.
- Utilize Tax Deductions: Efficiently use available tax deductions to significantly lower your tax liability during repayment.
By understanding and planning your house loan effectively, you can maximize your tax savings while repaying your home loan, ultimately reducing your overall tax burden.
Always consult a tax professional for personalized advice!
Frequently Asked Questions (FAQs)
How much interest on a housing loan is exempt from income tax?
The amount of interest on a housing loan that is exempt from income tax depends on the type of property:
- Self-Occupied Property: You can claim a deduction of up to ₹2 lakh on the interest paid under Section 24(b).
- Let-Out Property: There is no upper limit on the interest deduction. You can claim the full amount of interest paid.
For both types, you must ensure that the property is either self-occupied or rented out to qualify for these deductions.
How can I save my income tax by taking a loan?
You can save on income tax by taking a loan, particularly a home loan, through various deductions allowed under the Income Tax Act.
Here’s how:
- Interest Deductions: For a self-occupied property, you can claim up to ₹2 lakh on interest paid under Section 24(b). For a let-out property, you can claim the entire amount of interest paid, with no limit.
- Principal Repayment Deductions: Under Section 80C, you can claim deductions of up to ₹1.5 lakh on the principal portion of your home loan repayment, as well as on stamp duty and registration fees.
- Pre-Construction Interest: You can claim deductions for interest paid during the pre-construction period in five equal installments once the construction is completed.
- Joint Home Loans: If you take a loan jointly with a spouse or another person, both can claim deductions, effectively doubling the benefits (up to ₹4 lakh on interest and ₹3 lakh on principal).
- Additional Deductions for Affordable Housing: Under Section 80EEA, you can claim an additional deduction of up to ₹1.5 lakh if you buy an affordable home.
- Loan for Renovation: If you take a loan for property renovation, you can claim deductions under Section 24(b), limited to ₹30,000 for self-occupied properties.
By understanding and utilizing these provisions effectively, you can significantly reduce your taxable income and save on taxes while repaying your loan.
Can a joint home loan help me save more on taxes?
Applying for a home loan jointly, rather than individually, can provide a larger loan amount and allow both borrowers to maximize tax deductions on the principal and interest.
- Tax Deductions for Self-Occupied Property: Each joint owner can claim up to Rs. 1,50,000 in interest deductions under Section 24. This means if you own a house together, both of you can claim this amount separately.
- For Rented Properties: If the property is rented out, there’s no limit on the interest deduction—each owner can claim the full amount of interest paid.
- Share Proportion: Tax benefits will depend on your share in the property. For example, if you own 40%, calculate your interest share and claim accordingly, up to the allowed limit.
- Principal Repayment Deductions: Each co-owner can also claim up to Rs. 1,50,000 for the principal repayment under Section 80C.
- Benefits for Working Couples: If both spouses are employed, a joint home loan can significantly enhance tax savings by allowing claims on both the interest and principal amounts.
To claim these benefits, ensure you have a bank certificate detailing the separate amounts for interest and principal for the financial year.
Who can claim tax deductions on housing loans?
Only property owners can claim tax deductions. If the loan is taken jointly (e.g., with a spouse), both borrowers can claim deductions based on their ownership share.
How much tax benefit do I get on a home loan?
You can claim:
- Up to ₹2 lakh under Section 24(b) for interest on a self-occupied property.
- No limit on interest deduction if the property is rented out.
- Up to ₹1.5 lakh under Section 80C for principal repayment, stamp duty, and registration fees.
- Additional deduction can be claimed under section 80EE or 80EEA.
Are there any tax benefits on a second home loan?
Yes, for a second home:
- If self-occupied, you can claim interest deductions up to ₹2 lakh.
- If rented out, you can claim full interest deductions, but must declare rental income.
Can my spouse claim income tax deduction when we buy the house jointly?
Yes, your spouse can claim separate deductions if both are co-owners and co-borrowers, up to ₹1.5 lakh for principal and ₹2 lakh for interest each.
How to claim tax benefits on a home loan?
- Gather documents (ownership proof, loan statement, interest and principal certificates).
- For salaried employees, submit to your employer for TDS adjustments. Self-employed individuals do not need to submit these documents.
- Include income from house property in your Income Tax Return (ITR) and file to claim deductions.
Can I claim tax benefits if I purchase a property with a home loan, but the house is under construction?
No deductions can be claimed for interest until the construction is complete. Once complete, you can claim pre-construction interest in five equal installments starting from the year of possession.
Is there a limit to the amount of interest that I can claim as a deduction?
Yes, the limit is ₹2 lakh for self-occupied properties under Section 24(b). No limit applies for let-out properties.
Can I claim tax benefits on a home loan taken for the renovation of a property?
Yes, you can claim tax benefits for renovation loans under Section 24(b), but the deduction is capped at ₹30,000 per annum for self-occupied properties.
Can you claim deductions under both 80C and Section 24 for home loans?
Yes, you can claim both:
- Section 80C: Up to ₹1.5 lakh for principal repayment and related costs.
- Section 24(b): Up to ₹2 lakh for interest on self-occupied properties; no limit for let-out properties.
Is home loan interest part of Section 80C of the Income-tax Act?
No, Section 80C applies to principal repayments only, not interest. You can deduct the principal up to ₹1.5 lakh.
How to utilize the available deductions to the fullest?
If both partners are working, consider a joint home loan. This can enhance loan eligibility and increase tax benefits, allowing a combined deduction of ₹3 lakh on principal under Section 80C and up to ₹4 lakh on interest under Section 24.
Can home loan principal be claimed in 80C?
Yes, the principal repayment of a home loan can be claimed under Section 80C of the Income Tax Act. You can claim a deduction of up to ₹1.5 lakh per financial year on the principal amount paid.
This section also covers expenses related to the purchase of the property, such as stamp duty and registration fees. However, it’s important to note that if you sell the property within five years of possession, the deductions claimed will be added back to your income in the year of sale.
