In India, buying a home is a dream for most individuals. Despite the need for making monthly payments, home loans can offer significant tax advantages. By utilising the deductions allowed under the Income Tax Act of 1961, you can minimise the amount of tax you owe on your home loan while achieving your goal of homeownership.
Atul Monga, CEO and co-founder of BASIC Home Loan, highlights different tax savings on home loans and how they can make a positive impact on our financial situation.
Interest deduction- Section 24(b)
You have the opportunity to reduce your taxable income by the interest paid on your home loan. This benefit falls under Section 24(b) of the Act. However, there is a maximum cap on this deduction: Rs 2 lakh for a self-occupied property completed within five years of loan initiation. For example, if your interest payments on a home loan total Rs 3 lakh in a fiscal year, you’re eligible to claim a deduction of up to Rs 2 lakh under this provision.
There is no upper limit for claiming tax exemption on interest for let-out properties. This means you can deduct the entire interest paid on your home loan. If the construction extends beyond the specified period of five years, you can only claim deductions on home loan interest of up to Rs 30,000 for the financial year.
However, if you’ve purchased an under-construction property and haven’t moved in yet but are paying EMIs, you can start claiming interest on the home loan as a deduction only after the construction is completed. On the other hand, if you purchase a fully constructed property, you can claim this deduction immediately.
The Act permits you to deduct the interest paid during the construction phase of your house, referred to as pre-construction interest. This deduction is allocated over five equal installments, commencing from the year of property acquisition or completion of construction. It’s essential to differentiate this deduction from the standard deduction applicable to the interest component of your EMI after construction (under Section 24(b)). However, there’s still a maximum annual limit of Rs 2 lakh that applies to the total of pre-construction interest and regular interest deductions.
Principal repayment deduction- Section 80C
Section 80C allows you to claim a deduction for the principal amount repaid on your home loan, along with registration and stamp duty charges. Under this Act, you can claim a deduction of up to Rs 1.5 lakh on the principal portion of your home loan EMI. This deduction is grouped with other tax-saving investments such as PPF and ELSS mutual funds under Section 80C, with a total combined limit of Rs 1.5 lakh for these deductions.
It’s crucial to note that to benefit from this deduction, you must refrain from selling the property within five years of acquiring possession. Selling it sooner may result in the deducted amount being added back to your taxable income for that year.
By opting for a joint home loan with a co-owner, both of you can individually claim this deduction, effectively doubling the tax benefit (within the overall Rs 1.5 lakh limit prescribed under Section 80C).
Extra deduction under Section 80EE
Section 80EE offers an extra deduction for interest paid on home loans for first-time homebuyers. However, it comes with specific restrictions:
- Validity period: The benefit was valid for loans sanctioned from April 1, 2016, to March 31, 2017. Loans sanctioned outside this timeframe are not eligible for Section 80EE deduction. As the validity period for Section 80EE has lapsed, it no longer applies to new home loans.
- Income ceiling: No specific income limit is stated for claiming this deduction.
- Loan and property value limits: To qualify for the deduction, the loan amount must be Rs. 35 lakh or lower, and the property value should not exceed Rs 50 lakh.
- First-time homebuyer: This deduction applies only to individuals who are first-time homeowners at the time of loan sanction.
Additional points for consideration
Availing a deduction for the principal repayment of your home loan can substantially lessen your tax liability, but it’s important to keep some additional considerations in mind.
These benefits are accessible only if you opt for the old tax regime when filing your income tax returns. The new tax regime introduced in the 2023 budget does not incorporate these deductions.
When you and your spouse jointly obtain a home loan and co-own the property, each of you can claim individual deductions for both interest and principal repayment, effectively doubling the tax benefit.
Word of advice
To ensure that you are taking advantage of all available deductions and maximising your tax savings according to your specific circumstances, it is recommended that you stay informed and consult with a tax advisor. This will not only help you remain compliant with tax regulations but also enable you to make the most of tax benefits based on your income and investments.
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