Home Loan Tax Exemption: The Hidden Pathway to Saving Big

Read on to know how home loans come with home loan tax benefits that allow home loan borrowers to save a considerable amount of money in taxes each year.

Home Loan Tax Benefits

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These days, most homebuyers avail of a home loan to buy a home. Even those who can afford to pay for a house in one go prefer to avail of a home loan to facilitate home purchase. Home loans allow borrowers to keep their savings safe for a rainy day. Further, home loans come with home loan tax benefits that allow home loan borrowers to save a considerable amount of money in taxes each year. With the help of a home loan, homebuyers can claim tax deductions up to Rs.3.5 Lakh and higher, provided they meet certain conditions. Home loans are repaid in the form of EMIs. Each EMI is divided into two parts: the first part covers the interest component of the home loan, and the second part covers the principal component. Borrowers can claim a housing loan tax benefit on both the principal as well as the interest component of a home loan. Let us look at how home loan borrowers maximise savings with home loan tax benefits available to Indian tax payers.

Home Loan Tax Benefits Explained

Home Loan Tax Benefits Under Section 80C

Home loan borrowers can claim tax benefits on payments made towards the interest component of a home loan under Section 80C of the Income Tax Act. Under this section, the maximum limit for claiming tax deductions is Rs.1.5 Lakh. Home loan borrowers must also keep in mind that home loan tax benefits claimed under Section 80C get reversed if the home loan borrower sells their home within 5 years of buying it. Further, borrowers must also keep in mind that Section 80C of the Income Tax Act does not only deal with tax benefits on home loans. Various other tax-saving schemes, such as ELSS, Public Provident Fund, National Pension System, National Savings Certificate, etc., are also covered under this section. However, the combined limit for these tax-saving instruments under Section 80C is Rs.1.5 Lakh.

2. Home Loan Tax Benefits Under Section 24b

Unlike Section 80C, which deals with several different tax-saving instruments, section 24b of the Income Tax Act deals only with the tax benefits available on the interest component of a home loan. Under this section, home loan borrowers can claim tax benefits up to a maximum of Rs.2 Lakh on payments made towards the repayment of the interest component of a home loan. However, there are a few things that one must know about home loan tax benefits under Section 24b. One can avail of a home loan only for buying or constructing a home. Let’s assume you bought a home while it was still being constructed. In this case, you will be able to claim tax benefit on the interest component of the loan only after construction is complete. You will have to claim tax benefit on the interest component in five equal instalments spread over 5 years. If the construction of the property does not get completed within 5 years of availing of the loan, the maximum tax benefit that one can claim under Section 80C automatically gets reduced to Rs.30,000 per year. Borrowers must also know that while the limit for claiming tax benefit on the interest component of a loan for self-occupied homes is Rs.2 Lakh, there is no limit for claiming tax benefit on the interest component of the loan if the property is a let-out property or in other words, you have rented it out.

3. Home Loan Tax Benefits Under Section 80EE

Individual borrowers and first-time homebuyers can claim an additional tax benefit up to Rs.50,000 on the interest component of their home loan until the end of their loan tenor provided they had availed of a home loan between April 1, 2016 and March 31, 2017 to buy an affordable house, the value of which at the time of buying the house was not above Rs.50 Lakh and the value of the loan availed of for the purpose of buying the home did not exceed Rs.35 Lakh. Tax deductions available under Section 80EE are over and above the tax deductions available under Section 24b of the Income Tax Act. Section 80EE came into effect in 2013 and was valid for only 2 years. However, this section was reintroduced in 2016 and now those eligible to claim tax benefit under it can continue to do so until the end of their loan tenor.

4. Home Loan Tax Benefits Under Section 80EEA

Individual home loan borrowers and first-time homebuyers who had availed of a home loan between April 1, 2019 and March 31, 2022 can claim an additional tax benefit up to a maximum of Rs.1.5 Lakh and over and above the tax benefits available under Section 24b of the Income Tax Act provided they had invested in affordable housing and the stamp value of the home bought with the loan money at the time of availing of the loan did not exceed Rs.45 Lakh. Further, only those home loan borrowers can claim tax benefit under this Section of the Income Tax Act who are not eligible to claim tax benefit under Section 80EE of the Income Tax Act.

Final Words

In conclusion, by way of home finance, home buyers and tax payers become eligible for several tax benefits and can claim tax deductions in lakhs and save a considerable amount of money. Further, home loan borrowers must also know that in case of joint home loans, all home loan applicants can claim tax benefits separately. Thus, in case of a joint home loan availed of by a couple, a husband and wife can claim tax benefits separately and maximize their combined tax savings to Rs.7 Lakh or even higher. Home loan borrowers must familiarize themselves with the various sections of the Income Tax Act and how they can claim tax benefits under these various different sections and maximize their tax savings.

First published on: 03-07-2023 at 16:04 IST