Tax Benefit on Home Loans

In the Income Tax Act 1961, there are multiple provisions under which you can claim tax deductions to save money on income tax. And among all the categories of tax deductions, you can save most while paying off a home loan.

The tax deductions are part of relief by the government to make a home purchase more affordable and encourage citizens to invest in houses. This has a multiplier effect on the economy, as it creates jobs and improves consumption, contributing to the overall growth of the economy.

You can avail of tax benefits on house loan repayments under Section 80C, Section 24, and Section 80 EE. However, to claim tax deductions, you need to fulfil the following two specific criteria:

• A home loan must be used for the purchase or construction of the house property
• The construction of the house property must be completed within 5 years from the end of the financial year, in which the loan was taken

If you are confused about how to avail of home loan tax benefits, read this article till the end to have a better understanding.

Home Loan Income Tax Deductions

A home loan EMI consists of two components- principal payment and interest payment. And the Income Tax Act allows claiming tax deductions on both components individually. Let’s discuss all the sections in detail.

Tax Benefits on Home Loans

Home loans come with several tax benefits that can help reduce the financial burden of buying a house. Borrowers can claim deductions on both the principal repayment and the interest paid on the home loan.

Under Section 24 of the Income Tax Act, the interest paid on a home loan is eligible for deduction up to INR 2 lakhs per year for a self-occupied property. Additionally, under Section 80C, the principal repayment of the home loan is eligible for a deduction of up to INR 1.5 lakhs. For properties that are rented out, there is no upper limit on the interest deduction under Section 24(b).

Section 80C

Section 80C is one of the popular tax deduction sections amongst taxpayers as it allows them to reduce tax liability by claiming deductions on 80C-compliant investments and principal repayments on the home loan.

When it comes to tax benefits on your house loan, you can claim a maximum deduction of up to INR 1.5 lakh from your taxable income for the principal repayments. Please note that the INR 1.5 lakh limit applies to the whole of Section 80C and includes other components in Section 80C such as insurance policies, investment in ULIPs, etc. For instance, if you already have investments up to INR 50,000 under 80C, you can only claim tax benefits for the principal repayments of your home loan for an amount not exceeding INR 1,00,000.

Additionally, you can also claim a housing loan tax benefit on the payments made towards stamp duty and registration charges for the house property. The deductions can be claimed only once a year and should be claimed in the same year the expenses were incurred.

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Section 24

Under Section 24, you can claim a tax deduction of up to INR 2 lakh on the total interest paid on a home loan during the financial year.

However, if the construction of a house property is not completed within 5 years, one can claim a maximum tax deduction of only up to INR 30,000.

Section 24 (b)

Section 24 (b) allows claiming home loan tax benefits on the interest amount paid towards the loan during the construction period. The tax deduction on interest paid during the construction period can be claimed in five equal instalments from the date of completion of construction or when the property is acquired.

In the home loan, the co-applicant carries equal responsibility for the timely repayment of the loan amount along with the primary borrower. Therefore, in case of default, the co-applicant will take full responsibility for making payments towards repaying the home loan. 
However, the total interest amount for tax deduction should not exceed INR 2 lakh (including Section 24).

Section 80 EE

If you are a first-time homebuyer, you can claim an additional tax benefit on housing loans in the form of a deduction of up to INR 50,000 on the interest paid on a home loan every financial year under this section.

To be eligible for tax deductions under Section 80EE, the home loan amount should not exceed INR 35 lakhs and the stamp value of the house property should not exceed INR 50 lakhs.

Section 80 EEA

Under this section, a first-time homebuyer is eligible to claim an additional house loan tax benefit in the form of a deduction of up to INR 1.5 lakhs on the interest paid on a home loan every financial year.

To be eligible for claiming tax deduction under Sec 80 EEA, the stamp value of the property should be INR 45 lakhs or less. The carpet area of the house should not exceed 645 sq ft in metropolitan cities and 968 sq ft in any other city or town.

You cannot avail of the tax benefits under Sec 80 EE if you have already availed of the home loan tax benefit under Sec 80 EEA.

This benefit is not available from Apr 01, 2022 onwards.

Home Loan Tax Benefits to Co-Applicant

A co-applicant in a home loan is also eligible to claim tax benefits on housing loans as per their contribution made towards repaying the home loan. However, you should note that to claim tax deductions on home loan repayments, the co-applicant should be the joint owner of the property.

Applying for a home loan with a co-applicant helps to maximise tax savings by claiming a full deduction for the payments made towards the home loan.

How Much Tax Benefit on Home Loans Can Be Availed by Individual Tax-Payers

An individual can claim income tax benefits on a home loan as deductions of up to INR 3.5 lakhs under normal circumstances. Additionally, first-time home buyers can save an additional sum of up to INR 1.5 lakhs on their taxable income.

In the case of a home loan taken jointly, with proper tax planning, both primary and co-applicants can get tax deductions on the entire sum paid towards home loan repayment.

With proper EMI and tax planning, you can get maximum tax benefits on your home loan, which helps to reduce your house ownership cost and gives you a sense of accomplishment.

How Do I Claim Tax Breaks for Home Loans?

To claim tax benefits on home loans in India, follow these steps:

• Collect Necessary Documents: Keep all documents related to your home loan, including the loan statement, interest certificate, and completion certificate.
• Calculate Deductions: Calculate the interest and principal amounts eligible for deduction based on the provisions of Sections 24, 80C, and other relevant sections.
• File the Income Tax Return (ITR): Include the eligible deductions in your ITR form under the appropriate sections.
• Submit Proof: If requested by the Income Tax Department, submit the relevant documents to support your claim.
• Verify: Double-check your calculations and claim before filing to avoid errors.

By following these steps, you can efficiently claim tax breaks for your home loan and reduce your taxable income.

How to Calculate Home Loan Tax Benefits?

Calculating home loan tax benefits involves determining the eligible deductions under various sections of the Income Tax Act. Here's how you can do it:

• Interest Calculation: Calculate the total interest paid on the home loan during the financial year.
• Principal Calculation: Determine the total principal repayment made during the year.
• Apply Section 24: Check if the interest amount is within the INR 2 lakh limit for self-occupied properties or the actual interest paid for rented or deemed rented properties.
• Apply Section 80C: Ensure that the principal repayment amount is within the INR 1.5 lakh limit.
• Consider Additional Deductions: If applicable, consider additional deductions under sections like 80EEA or 80EEB.
• Calculate Total Deductions: Add up all eligible deductions to get the total tax benefit.

You can also use an online calculator to easily and accurately calculate the home loan tax benefits.

Conclusion

In conclusion, tax benefits on housing loans in India can significantly reduce the financial burden of owning a house. By taking advantage of deductions under sections like 24, 80C, 80EEA, and others, individuals can save a substantial amount on their taxable income. It's important to keep track of the various provisions and eligibility criteria to maximise these benefits. If you're considering buying a home and want to explore financing options, consider SMFG Grihashakti for attractive home loan offers. Start your journey to homeownership with SMFG Grihashakti home loans today!