Are you planning to avail a home loan? Have you already availed a home loan but are not sure if you should prepay your loan or keep it as it is because of the associated tax benefit? If so, this article may help you decide your way forward.
Although your bank must have already educated you well about all the tax benefits of availing a home loan, if they have not, let me first brief you about the tax benefits of availing a home loan.
Firstly, you will buy the home and incur some stamp duty and registration expenses. You can claim a deduction for the same under section 80C of the income tax act. This is a one-time deduction available to you.
Secondly, after your home loan is processed, you will start paying EMI. Your EMI is the sum of principal and interest you pay each month to your bank. The deduction for the principal amount is available under section 80C of the income tax act. A deduction for the interest amount is available under various sections with some pre-requisites and conditions.
Summary of all the tax benefits available on home loan:
| Component | Maximum deduction | Section under which the benefit is available | Important points |
| Stamp duty and registration charges | Rs. 1.5 Lakh | 80C | This is a one-time deduction. |
| Principal part of EMI | You shouldn’t sell your property within 5 years of claiming this deduction. If you do so, the claim will be reversed in the year in which you sell the property. | ||
| Interest part of EMI | Rs. 2 Lakh | 24b | This is with respect to the purchase or construction of a new house, which must be completed within 5 years from the financial year in which the loan is availed. |
| Rs. 50,000 | 80EE | This is available if the loan is sanctioned between 1 April 2016 to 31 March 2017. The principal amount should not exceed Rs. 35 lakh and the value of the property should be Rs. 50 lakh or less. On the date of the sanction of the loan, you should not own any other house property. | |
| Rs, 1.5 Lakh | 80EEA | This is available if the loan is sanctioned between 1 April 2019 to 31 March 2022 and the stamp duty value of the home should be Rs. 45 lakh or less. On the date of sanction of the loan, you should not own any other house property. |
Isn’t it amazing that so many tax benefits are available to you for buying a home? You might be thinking that once you obtain a home loan, you will not be required to pay any taxes. But, once you avail a home loan and start claiming the deduction in your income tax return, you will notice you are still paying high taxes, but why?
Isn’t it amazing that so many tax benefits are available to you for buying a home? You might be thinking that once you obtain a home loan, you will not be required to pay any taxes. But, once you get a home loan and start claiming the deduction on your income tax return, you will notice you are still paying high taxes. But why?
Let me explain to you. The whole bunch of deductions is interlinked. 80C has a maximum deduction limit of Rs. 1.5 lakh. Section 80C of the income tax act allows deductions for many components, such as Public Provident Fund, Employee Provident Fund, Equity Linked Saving Scheme, National Saving Certificates, Senior Citizen Saving Scheme, Unit Linked Insurance Plan, 5-year Fixed Deposit, and Sukanya Samriddhi Yojana.
A deduction with respect to principal repayment of a home loan is one of the components of 80C deductions. Therefore, even without availing the deduction of the principal repayment amount, you can easily claim the maximum deduction of Rs 1.5 lakh under section 80C. The deduction with respect to stamp duty and registration expense is a one-time deduction only, hence not discussed.
Now let’s talk about the interest component. The deduction under sections 80EE and 80EEA comes with certain conditions and may not be available to all. Hence, the only benefit available to you is the deduction under section 24b with respect to the interest component of the EMI, which is restricted to Rs. 2 lakhs in a year. Remember that the 2 lakhs is only the deduction amount, not the actual tax benefit. The benefit you are getting is the tax slab you are falling into. For example, if you fall into a 30% tax slab, the benefit you are getting is the 30% of interest component of EMI.
Let me explain it to you with the help of an example:
Let’s assume three scenarios of availing a home loan of Rs. 15 lakhs, Rs. 20 lakhs, and Rs. 45 lakhs at an interest rate of 7.5% for 20 years. The estimated EMI with a break-up of principal and interest from 1st January 2022 to 31st December 2022 is tabulated below-
| Loan amount | EMI | Principal paid in a year | Interest paid in a year | Tax bracket* | Tax saving on Interest** |
| 15,00,000 | 12,084 | 33,648 | 1,11,359 | 30% | 34,744 |
| 30,00,000 | 24,168 | 67,716 | 2,22,297 | 30% | 62,400 |
| 45,00,000 | 36,252 | 1,01,574 | 3,33,446 | 30% | 62,400 |
* An effective tax rate of 31.2% has been used for the purpose of computation, which includes health and education cess.
**For computing the tax saving on interest, only the deduction of interest under section 24b has been considered since the deduction u/s 80EE and 80EEA is available only under certain conditions. Further, the deduction available for principal repayment under section 80C has also been excluded from the computation for the reason mentioned above.
As you can notice, since there is a cap on the maximum deduction available to you, your tax savings is also limited. Hence, whether you avail a loan of Rs. 30 lakhs or Rs. 45 lakhs, the tax benefit is going to be the same in most cases.
Another important point is the composition of EMI. In the initial years, the interest component of your EMI is higher, and as the years increase, the principal component increases, and the interest component decreases. Hence, the tax saving in the initial years is going to be comparatively higher than the tax saving in future years in most cases.
As a result, if you are considering availing a home loan or have already availed a home loan and are planning to repay it, do not be dazzled by the tax benefits; rather, calculate the actual tax benefit versus the interest cost you are incurring or will incur.
Author Bio
