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Until a few years ago, homebuyers knew only one way of buying a home — they saved and saved for years and when they had saved enough, they would invest in a home. The biggest problem with this approach is that since real estate prices are always increasing, waiting for years to buy your dream home inevitably leads to financial loss in terms of return on investment. This is the prime reason why home loans have become so popular these days. Instead of feeling compelled to wait for years to become a homeowner, home loans help homebuyers buy their dream home today and pay for it in a systematic manner over the years.
Further, home loans also bring with themselves home loan tax benefits. Home loans are repaid in the form of EMIs. Each EMI is divided into two components, one goes towards the repayment of the principal component of the loan and the other goes towards the repayment of the interest component. Home loan borrowers can claim a home loan tax exemption on both the components of a home loan.
In this article, we talk about how to maximize savings on home loam principal repayment. So, read on.
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Home Loan Tax Exemption Under Section 80C of the Income Tax Act
Section 80C of the Income Tax deals with home loan tax exemptions available on the payments made towards the repayment of the principal component of a home. As per this section, a borrower can claim home loan tax exemption up to a maximum of Rs.1.5 Lakh on payments made towards the repayment of the principal component of the home loan. Under Section 80C, borrowers can claim tax exemption on payments made towards stamp duty and registration charges.
However, the maximum tax deduction available under this section of the Income Tax Act is Rs.1.5 Lakh. Further, there are certain conditions that must be met. To start with, these deductions are available only if the home loan had been taken for the purchase or construction of a new home. Further, if a borrower wants to claim home loan tax exemption under this section of the Income Tax Act, they must not sell the house within five years of buying it. Doing so will lead to all the benefits they had claimed under this section of the Income Tax Act getting reversed.
Let us now understand what a borrower can do to maximize benefits available under Section 80C.
How to Maximize Tax Savings on Home Loan Principal Repayments
Section 80C of the Income Tax Act states that in the case of joint home loans, borrowers can claim home loan tax exemption on payments made towards principal repayment separately. Going by this, one of the easiest ways to maximise your savings under Section 80C is to avail of a joint home loan.
For instance, if you are married, instead of availing of a home loan entirely on your name, you can opt for a home loan with your partner. Doing so would make it possible for you and your partner to claim home loan tax deductions separately under Section 80C of the Income Tax Act. Thus, in this case, as a family, you will be able to claim home loan tax exemption up to a maximum of Rs.3 Lakh under Section 80C of the Income Tax Act.
While we are on the topic of home loan tax exemptions, let us look into the other sections of the Income Tax Act that allow for home loan tax exemptions.
Section 24b of the Income Tax Act
Section 24b of the Income Tax Act states that home loan borrowers can avail of a loan up to a maximum of Rs.2 Lakh on payments made towards the repayment of the interest component of their home loan. This stands true only for already-constructed properties. Borrowers can also claim income tax benefit on payments made towards interest repayment during the construction phase in five equal instalments of Rs.30,000 each spread over five equal instalments.
Income Tax Exemption Under Section 80EE of the Income Tax Act
Section 80EE of the Income Tax Act states that borrowers can claim an additional deduction up to a maximum of Rs.50,000 on payments made towards the interest component of a home loan. However, these tax deductions are only available to first-time homebuyers who had availed of a home loan between April 1, 2016 and March 31, 2017. Further, to be able to claim home loan tax benefits under this section, the value of the property availed of with the loan money must not have exceeded Rs.50 Lakh at the time of sanctioning of the loan and the value of the loan must not have been any higher than Rs.35 Lakh.
Section 80EEA of the Income Tax Act
Section 80EEA of the Income Tax Act states that borrowers can claim an additional deduction of Rs.1,50,000 on payments made towards the interest component of the home loan provided the borrower is a first-time homebuyer who had availed of a loan between April 1, 2019 and March 31, 2022. However, please note that one can claim this income tax benefit only if the stamp duty of the property does not exceed Rs.45 Lakh.
Final Words
All in all, a home loan makes one eligible for substantial income tax benefits. Therefore, before applying for a home loan, use an income tax calculator to figure out your tax obligation for the year after considering all the home loan tax benefits available to you and then have your employer deduct tax at source. This will protect you from having to pay a substantial amount of money at the end of the year to cover your taxes.
