Tax Benefits on Home Loan

Article deals with Tax Benefit on Home loan under section 80C for Loan Principal Payment, Section 24 for Interest Payment, Tax planning of Home Loan & HRA.

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 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. In this article we will discuss Tax Benefits on 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/- . 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. 488,052

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.) 72,000
Taxable Income (In Rs.) NIL 168,000
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) (303,232)

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

Please note with effect from financial year 2017-18 Govt has restricted the limit of set off of loss from house property against other heads of Income to Rs. 2 Lakh. Till financial year 2016-17 there was no restriction and assessee was allowed to set -off any loss from house property against other heads of Income.

Please note the restriction is placed on set-off of losses and not on  the amount of home loan interest that can be claimed as a deduction under Section 24 for a rented house property, the losses which could arise on account of such interest repayment can be set off only to the extent of Rs 2 lakhs. Such loss in excess of Rs. 2 Lakh can be carried forward for upto 8 Assessment Years succeeding the year of loss.

(Republished With Amendments)

Categories: Income Tax

View Comments (26)

  • Hi
    I have taken loan of Rs. 5800000 for period of 20 years at 8.35 interest.
    House is let out property
    My wife is owner and i'm co-owner in property
    Can I declare complete interest under let out category and complete principal amount number my wife income tax.

  • myself and brother are suppose to buy one house. Both are employed. We need loan for 25 lakhs. Could please throw some light whether it is beneficial to have loan jointly or individually.

  • In first illustration, Total deduction claimed by the family for case 2 id displayed as Rs. 488,05 which is wrong. It should be Rs. 488,052. It seems like a typographical mistake.

  • Hi,
    I am planning to take a housing loan of Rs 20 lacs to buy a property from the current owner who got possession of the flat about 3-4 years back but never used the same.

    Hope i can take tax deduction on my housing loan.


  • I am a senior citizen and own a house property.I plan to build/construct an additional floor on the same house property for which planning to avail home loan.
    "Question: under which sections can I claim tax benefit and for how much amount if
    a) the newly constructed floor is Self occupied by me"
    b) the newly constucted floor is Let out on rent by me. I still stay in the same house in the other floors.
    Details of Loan:
    Loan Amount : 10,00,000 Lac (INR)
    Monthly EMI - 20,613 per month (INR)
    Interest rate: 8.70%
    Total interest which I will be paying in a period of 5 years
    Duration of Loan : 5 years from 1 April 2018 to 31 March 2023
    Expenses incurred before availing home loan in 2017:
    Paid charges to MCD for approval of construction and floor plan : 1,00,000 (INR) in the year 2017 (Loan was taken from relatives for this amount. Interest paid to relatives @7% p.a for 2 years)
    Home Loan taken in year 2018:
    "Expenses incurred at time of taking home Loan:
    Property clearance report charges: 6,000 (INR)
    Property Valuation charges : 7,000 (INR)"

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