Purchasing a home is a significant financial milestone for many, often requiring substantial investment. Home loans offer a practical solution to ease this financial burden, and the government further supports homebuyers through various tax benefits on home loans. These benefits, including home loan interest deductions, can lead to substantial savings. Here’s a comprehensive guide to understanding how much income tax you can save through a home loan.
Tax Benefits On Home Loan: Important Sections
When you take a home loan, you can claim income tax deductions on housing loan interest and other expenses under the provisions of the Income Tax Act of 1961. Let’s delve into the most important sections:
Section 80C
The maximum limit allowable for a income tax deduction on a home loan under section 80 C is INR 1.5 lakh per financial year. This cap covers all investments and expenses, like life insurance premiums, PPF contributions, ELSS, etc. This deduction in income tax is only applicable to residential properties, not commercial ones.
Expenses incurred for the stamp duty and registration charges as well can also be claimed under section 80C but are separate from loan repayments.
The property is not allowed to be sold within five years from the time of obtaining possession. If disposed of before the aforesaid period, the deduction claimed earlier shall be restored to the taxpayer’s income.
Section 24 (b)
According to the Income Tax Act of 1961, Section 24 (b) allows the deduction of interest on a home loan paid on a self-occupied house as well as on a borrowed house. A Deduction of up to INR 2 lakh per financial year can be made if the loan is for purchase or construction and the construction is finished within five years.
The deduction can be claimed from the year in which the construction of the property is finished or the property is purchased. This section is applicable for both self-occupied and let-out properties.
Section 80EE
Eligible buyers of residential property can also claim income tax deductions on home loans under Section 80EE of the Income Tax Act of 1961, depending on the interest paid on the loans.
To qualify, the taxpayer should not own any other residential property. This section allows a maximum deduction of INR 50,000 per financial year. This deduction is over and above the Rs 2 lakh limit that has been specified under Section 24(b). The loan must have been sanctioned by the bank between April 1, 2016, and March 31, 2017.
Apart from the above-mentioned condition, the property value should not be over Rs 50 lakh and the loan amount should not exceed Rs 35 lakh. The deduction is allowed only in respect of the interest part of EMI.
Section 80EEA
Additional house loan tax rebates are available to the housing society members under section 80EEA of the Income Tax Act, 1961, which extends the income tax benefits on the interest paid on home loans for first-time homebuyers purchasing affordable housing. To qualify, the loan must have been sanctioned by the bank between April 1, 2019, and March 31, 2022. The deduction limit under Section 80EEA is up to INR 1.5 lakh per financial year.
This deduction is over and above the Rs 2 lakh limit where interest on a home loan has been allowed under section 24(b) thus giving an overall relief of up to Rs 3.5 lakh per year for interest paid on the home loan.
The taxpayer should not own any other residential property at the time of sanction of the loan and should fulfil the requirements of the Pradhan Mantri Awas Yojana (Affordable Housing Scheme) for affordable housing.
Tax Benefits for First-Time Home Buyers
Any first-time homebuyer in India is eligible for the following income tax benefits:
Section 80C
- Provided to ordinary citizens and Hindu undivided families.
- Property must not be sold within five years of possession.
- Stamp duty and registration charges have also been included in this limit.
Section 80EEA
- It is particularly applicable for the affordable housing segment, where the stamp duty value of the particular property is INR 45 lakh or below.
Interest Rate Deduction on Home Loan for Pre-Construction Phase
Interest paid during the pre-construction phase can also be claimed as a deduction of interest on home loans, subject to specific conditions:
- The amount of interest paid during the pre-construction period can be deducted in five equal installments after the construction of the project or after the possession of the project.
- This exemption on home loan interest is possible due to Section 24(b), valid up to INR 2 lakh for self-occupied properties only.
- Stakeholder interest is allowable only if the construction or purchase of the property is finished within five years from the end of the financial year in which the loan was sanctioned.
Tax Benefits on Joint Home Loans
Opting for a joint home loan is a better way of maximising home loan tax exemption advantages. Here’s how it works:
- Both the co-borrowers can claim home loan interest deductions separately under Section 80C and Section 24 (b), provided they are co-owners of the property.
- The principal amount may be claimed as a deduction under section 80C up to a maximum of INR 1.5 lakh by each co-borrower.
- The interest paid can be claimed by each co-borrower, up to a limit of INR 2 lakh, as per Section 24(b).
- To avail of these benefits, co-borrowers must contribute to loan repayment in proportion to their share of co-ownership.
This housing loan exemption strategy is particularly advantageous for families, as they can pool their incomes and get income tax benefits collectively.
Repayment Tax Benefits for Home Loans
Repayment of a home loan comprises two components: principal and interest. Both components offer income tax benefits:
Principal Repayment (Section 80C)
The major component of your home loan EMIs is allowed a deduction of up to INR 1.5 lakh. This benefit is applicable for residential property only. It does not include renewals, repairs, or reconstruction. The property cannot be sold in the first five years from when you gain possession of it, or the claimed deductions will be added to your taxable income.
Interest Repayment (Section 24(b))
Interest on borrowed money is allowed for a deduction of INR 2 lakh for a self-occupied house. There is no upper limit for a house that is let out or for a house that is jointly occupied with the owner. This deduction is applicable irrespective of whether the property is under construction or completed.
Other Important Deductions on Home Loans
Apart from the primary sections, here are some additional deductions related to home loans:
Stamp Duty and Registration Charges (Section 80C)
Stamp duty charges and registration fees paid while taking possession of the property can be further negotiated for deductions within the INR 1.5 lakh limit permissible under Section 80C.
Processing Fees and Other Charges
Each bank has its fee for loan processing. These fees are considered part of the loan expenses and are allowed for deduction under Section 24(b).
Second Home Loans
Interest repayment on home loans is exempted from taxes whether you go for a second home loan or not. However, the second property will be treated as rented if it is not occupied, and the receipt of income (or loss) from it will be taxed.
Bottom Line
Understanding the income tax benefits on home loans can significantly reduce your financial burden and make homeownership more affordable. Whether you’re a first-time buyer, joint borrower, or investing in multiple properties, these provisions help optimise your savings.
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Frequently Asked Questions
Can I get tax exemptions if my property is under construction?
Yes, you can claim the interest deductions on the borrowed amount from the bank during the pre-construction period. You have to fit the eligibility criteria for the same and the tax benefit for a home loan will be in accordance with section 24(b) of the Income Tax Act.
Is it possible to get home loans for a rental house with some tax benefits?
Yes, interest on rented properties is fully deductible without limits. However, the total loss under “house property” cannot exceed INR 2 lakh.
What would happen if you sell the property within 5 years of purchasing?
If you dispose of the property within five years, the deductions availed under Section 80C towards repayment of principal will be included in your taxable income.
What position do both co-owners stand in for tax benefits on a joint home loan?
Both co-owners, if they are co-borrowers, can claim tax benefits on home loans separately over and above whatever proportion of the interest they pay.
Does stamp duty qualify for tax relief?
Yes, stamp duty and registration charges can be availed under section 80C, subject to an overall ceiling of INR 1.5 lakh.