Buying a home is always a dream. It needs to be well planned and then executed so as to make the most of it. In fact it is quite an important step in Financial Planning. Managing to buy a home out of once own savings seems a faraway dream even for high net worth individuals. There is always a case of savings falling short of the property value. Thus, Home Loan comes to the rescue!

However, with the falling interest rate regime during the period from 1999 to 2006 and the introduction of tax benefits on the interest paid on housing loan and repayment of principal amount, taking a home loan is not only easy but also a favored option. In fact, even if you have the money to buy it outright, availing a home loan may be mathematically a better option. Multiple tax benefits are one of the most important reasons for availing a Home Loan.

Tax Benefits for Various Sections of Home Loan:

The tax benefits under various sections of the Income Tax Act not only attract people who need a loan put is also beneficial for people who can pay out of there on source of savings, as it provides them flexibility in payment and they need not do away with their liquidity.

Let’s first note the various income tax provisions under which tax benefits are available to the tax payers:

  • Tax Benefits for Interest paid on housing loan: Repayment of housing loan is through Equated Monthly Installments (EMI) which consists of principal and interest component. Interest component of the EMI is allowed as deduction under the head ‘Income from Housing Property’, u/s 24 of the Income Tax Act. The amount permissible for deduction is Rs. 2,00,000/- for AY2017-18. Further, in case the house against which loan is taken is given on rent, there is no cap on the amount of interest allowed as deduction.
  • Tax Benefits for Repayment of principal on Home Loan: The principal component paid out of the EMI is permissible as deduction up to Rs. 1,50,000/- under section 80C of the Income Tax Act.
  • Interest paid during the pre-construction period on Home Loan: Interest deduction cannot be claimed for under construction property. However, once the construction is completed, the amount of interest paid on the loan borrowed prior to completion, which is ‘Pre-construction interest’, can be claimed as deduction in 5 equal installments from the financial year in which construction is completed. Further, construction has to be completed within 5 years from the end of the financial year in which loan is taken.

Thus, the above deductions if availed prudently could benefit the tax payer and home loan becomes a favored option to putting in savings.

Also, keep in mind the following points while maximizing deduction benefits:

  • Higher deduction in case of a Joint Home loan and ownership: In case both husband and wife are working, the deduction with respect to interest on home loan and repayment of principal can be claimed by both in proportion of their ownership share.

Let us understand with a simple illustration:

In the following cases, it is assumed that home loan of Rs. 50 lakhs is availed for a period of 20yrs @9.5%.

Case 1: The house is owned and Home loan is taken by a single holder.

Case 2: The house is jointly owned and Home loan is taken by both the partners.

The table below shows the amount of deduction that can be claimed in the first year.

Case 1 Case 2
Loan Taken by Single Holder Wife Husband
Property share 100% 50% 50%
Loan Amount (In Rs.) 5,000,000 2,500,000 2,500,000
No. of Years 20 years 20 years
Rate of Interest for Home Loan 9.5% 9.5%
Equated Monthly Installment (EMI) per month (In Rs.) 46,607 23,304 23,304
Amount repaid Annually (In Rs.) 559,284 279,642 279,642
Interest Amount repaid (In Rs.) 471,232 235,616 235,616
Principal Amount repaid (In Rs.) 88,052 44,026 44,026
Tax Deduction that Can be claimed
Interest deduction u/s24 (In Rs.) 200,000 200,000 200,000
Repayment of principal u/s 80C (In Rs.) 88,052 44,026 44,026
Total deduction that can be claimed (In Rs.) 288,052 244,026 244,026
Total deduction claimed by the family Rs. 288,052 Rs. 488,05

From the above illustration, you will notice that together a couple can claim additional deduction of Rs. 2 lakhs.

  • Avail both Home loan deduction and House Rent Allowance (HRA) exemption: The deduction u/s 24 (Interest on home loan) and u/s 80C (Repayment of principal) can be claimed along with exemption of HRA. For e.g. A person has bought a flat in Pune and taken a home loan for the same. However, due to his job requirement he needed to shift to Mumbai in a rented apartment. In this case he can claim rent paid for the Mumbai Property as HRA exemption [u/s 10(13A)] along with deduction of interest and principal for the Pune property.
  • Rent a home and avail higher deduction: There is good news to those who intend to buy a second home and rent the same as the amount of interest deduction on home loan which is capped at Rs. 2, 00,000/- in case of self-occupied property, is not applicable for the rented property. The same is illustrated below:

In the following cases it is assumed that the loan of Rs. 50,00,000/- is availed for a period of 20yrs @9.5%. In Case 1 the house is used for self-occupation. In Case 2, the house is rented out @20,000 per month. Deduction that can be claimed in the first year.

Case 1 Case 2
Loan Amount (In Rs.) 5,000,000 5,000,000
No. of Years 20 years 20 years
Interest Rate 9.5% 9.5%
Equated Monthly Installment (EMI) per month (In Rs.) 46,607 46,607
Amount repaid Annually (In Rs.) 559,284 559,284
Interest (In Rs.) 471,232 471,232
Principal (In Rs.) 88,052 88,052
Annual Rent Received @20,000 per month (In Rs.) NIL 240,000
Less: Standard deduction of 30 % on Rental Income (In Rs.) 80,000
Taxable Income (In Rs.) NIL 160,000
Less :Interest u/s 24 (In Rs.) 200,000 471,232
Deduction that can be claimed as Loss on House Property (In Rs.) (200,000) (311,232)

Thus, tax benefits on home loan makes a case to avail home loan and buy your dream home.

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13 responses to “Tax Benefits on Home Loan”

  1. James says:

    Sir, I had been on leave for two month due to which I did not get transport allowance and secondly transferred. initially i was getting 800 as transport allowance and now i am getting 1600 as transport allowance. so how much transport allowance i can claim for rebate means actual or 19200.

  2. Ajay says:

    1. what is the deduction permissible for home extension loan?
    2. what is the deduction permissible for home improvement loan?

  3. Prashanth says:

    Could you please help me understand how this tax benefit works if we have a joint home loan?
    Are each of us entitled to 1.5lakh and 1lakh tax benefit on interest & principal on home loan?

  4. ramesh says:

    Hello sir,

    I have taken home loan in indore city for constructing the house,but I am staying in mumbai by rent also claiming house rent tax benefits because my job is at mumbai.now my parents are staying in my indore house.

    So please tell me how I will get tax benefit on home loan

  5. Ravi Ray says:

    I am availing a home loan in which my mother is co borrower. I am paying EMI from my income. I am working in PSU. The property is in the name of my mother .
    Can i take tax rebate?
    Upto what amount in which section?

  6. G Saravanan says:

    Hi

    House purchased in my father-in-law and my wife name. For my wife contribution I have taken PERSONAL LOAN and bought the house in my wife name.

    Should I claim personal loan repayment/Interest for tax exempt?

  7. Tushar Shah says:

    Sir, Kindly inform that a joint property (Flat) bought in the name of Father and Son and Home loan also taken jointly in the name of Father and Son, can we both, get the income tax benefit?. First name is son in property and Home loan. EMI is debited from the SB account of Son and Father. Possession is already taken.

  8. VIJAY VERMA says:

    Good Morning Sir, I have a query !!!
    I have a home home loan and house is registered in joit names with my wife. She is a home maker and i am talking all benefit of EMI & interest.
    Now we are expecting rent from the same house. Can wife alone take entire rent and other benefit by me?

  9. SANJAY PATEL says:

    Res. Sir,
    I had bought a my first home at baroda on basis of home loan of Rs. 12,13,483 /- sanctioned with indiabulls housing finance on dated 01/09/2014 and the disbursed amount of loan is Rs. 9,20,323 /-. My loan term in 230 months and EMI start from 31/10/2014 of Rs. 8866 /-.
    Now I had bought a my second home at Anand on basis of home loan of Rs. 35,00,000 /- sanctioned with My company ONGC on dated 11/08/2016 and the disbursed amount of loan is Rs. 21,00,000 /-. My loan term in 180 months and EMI start from 31/10/2016 of Rs. 24,172 /-.

    My both home are under construction till date.

    I am stay with my family at my work place Cambay with paying House rent Rs. 4500 /-
    Now how to take a benifite of income tax return please guide me.
    Sanjay patel 9426612137

  10. arvind kumar says:

    thanks for this imp. tax knowledge.

  11. Saurabh says:

    Boss

    Salary Can not be set off against any loss

    Please check setoff and carry forward sections

  12. JK SHARMA says:

    Dear Sir,

    One of our employee has reported loss from TWO House Properties as –

    One is Self Occupied, on which he is paying interest on Housing Loan Rs. 200,000/- & Second House is Let – Out, on which also he is paying interest on Housing Loan Rs. 800,000/- for the financial year 2016-17. He has claimed Loss of both House properties in Form 12B against his Salary Income for the financial year 2016-17.

    Now,

    Q1. Whether as Employer, can we consider Loss of Both House Properties to deduct his TDS u/s 192B of Income Tax Act?

    Q2. There is no option in TDS Return regarding disclosure of Rent Received/ Fair Rent, Tenant details etc. on Let – Out Property, than how can we disclose these details in TDS Return?

    Other requirement of Section 24 of Income Tax Act has been complied with. Kindly advise us on priority basis.

    With Regards –

    JK SHARMA

  13. afzal sakariya says:

    very usefull for tax knowledge

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