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Owning a home is a dream for many, and home loans make this dream a reality. To encourage people to invest in property, the Indian government offers various benefits on the repayment of home loans through tax deductions under the Income Tax Act of 1961.
While it might be costly to obtain a home loan, you can reap plenty of tax benefits when you choose the right financial plan for your needs.
Here’s what you need to know about income tax benefits on your home loan.
- Section 24 – Deduction for interest paid on home loan
To claim a tax deduction, the loan must be taken for the construction or purchase of a house property. If the loan is for house construction, the construction must be completed within five years from the time the loan was taken.
You can claim the interest portion of the home loan EMI for the year as a tax deduction from your total income under Section 24. The maximum deduction allowed is up to Rs. 2 lakh.
If the construction exceeds the stipulated time of five years, you can claim deductions on interest of home loan up to Rs. 30,000 for the financial year.
There’s no upper limit for claiming tax exemption on interest for let-out properties. This means you can claim a deduction on the entire interest you’ve made on your home loan.
- Section 80C – Deduction on principal repayment
Under Section 80C, a deduction is allowed on the principal paid on the home loan EMI for the year. You can claim up to a maximum of Rs. 1.5 lakh.
However, there’s a catch. To claim the deduction, you cannot sell the property within five years of possession. Otherwise, the deduction you claimed earlier will be added back to your income in the year of sale.
- Deduction on interest paid during the pre-construction period
Are you paying EMIs on an under-constructed property where you haven’t moved in yet? If so, you are eligible to claim interest on the home loan as a deduction. But the catch is this deduction is only possible once the construction is completed or immediately if the property you bought is fully constructed.
But wait. Does this mean you cannot enjoy tax benefits on the interest paid during the period falling between borrowing the home loan and completion of construction? No, it is not completely unavailable. There are some conditions.
The Income Tax Act allows borrowers to claim a dedication for pre-construction interest. Starting from the year you have acquired the property, or when the construction is complete, you can dedicate it in five equal installments. This is over and above the deduction you are otherwise eligible to claim from your property income. The maximum eligibility is capped at Rs. 2 lakh.
Moreover, if your home loan is eligible for deduction under Section 80EEA, an additional deduction of Rs. 1.5 lakh can be claimed over and above the Rs. 2 lakh limit (under Section 24(b)).
- Deduction for registration and stamp duty charges
You can also claim a deduction for registration and stamp duty charges. These can be claimed under section 80C and the amount is capped at Rs. 1.5 lakh.
However, it can be claimed only in the year these expenses are incurred.
- Section 80EE and 80EEA – Deductions
Under Section 80EE and 80EEA, additional deductions are allowed up to a maximum amount of Rs. 50,000. Homebuyers can claim this if they meet certain conditions. The conditions are:
1. The loan amount is Rs. 35 lakh or less
2. The property value is Rs. 50 lakh or less
3. On the date of loan sanction, the individual does not own any residential house property
Simply put, you must be a first-time homebuyer to claim tax benefits under Section 80EE.
Deduction under Section 80EEA was introduced in Budget 2019 to promote the housing sector. Homebuyers can claim a maximum of Rs. 1.5 lakh.
To be eligible for this deduction, you must meet the following conditions:
1. The stamp duty value of the property must be Rs. 45 lakh or less
2. You must not own any other residential property on the date of your loan sanction
3. You are not eligible to claim a deduction under the existing Section 80EE
Please note that you cannot claim deductions under both Section 80EE and Section 80EEA simultaneously.
- Joint home loan deduction
A joint home loan is taken by two individuals. You can apply for a joint home loan with your parents, siblings, or spouse. Nobody except your immediate family members is allowed to be a co-applicant.
When the loan is taken jointly, each loan holder can claim a deduction of up to Rs. 2 lakh each for home loan interest. Under Section 80C, each joint holder can claim a deduction for principal repayment of up to Rs. 1.5 lakh in their tax returns.
If all the requirements mentioned above are met, joint owners can also claim a deduction under Section 80EEA of up to Rs. 1.5 lakh each.
Therefore, if you jointly secure a home loan with your immediate family member or spouse, you can claim a much larger tax benefit.
Are these benefits applicable under the new tax regime?
No! If you opt for the new tax regime, you are not allowed to claim any deduction for interest paid in respect to a self-occupied house property (Section 24(b)), as the annual value of the property is considered nil. Also, deductions under Sections 80C, 80EE, and 80EEA are no longer available.
However, under Section 24(b), with respect to the let-out property, you are allowed to claim a deduction with respect to the interest paid. However, the deduction is only up to the taxable amount of rent after a deduction of 30% of the standard deduction. This is because you are not allowed to claim a set off of losses under the house property income against any other income during the year.
Additionally, you cannot carry forward any loss under the house property under the new tax regime.
Conclusion
Home loans provide tax benefits, especially under the old tax regime. By carefully analyzing and utilizing the tax benefits associated with home loans, you can significantly enhance your savings and financial planning.
