Purchasing a home is a notable milestone in anyone’s life because in that, you invest not only your money but also your emotions, so it becomes a very crucial part of anyone’s life. While homeownership comes with its fair share of responsibilities, it also brings several financial benefits, particularly in the form of tax deductions on home loans. These tax benefits can make owning a home more affordable, provide substantial savings over the loan tenure, and reduce your financial burden so that you can pay back your loan with ease.
In this article, we’ll explore the various tax benefits associated with home loans under the Income Tax Act of 1961, their eligibility criteria, and how you can maximize these benefits. By getting the knowledge of these provisions, you can make better and wiser financial decisions and reduce your overall tax liability.
What is a Home Loan?
A home loan is financial assistance offered by banks and financial institutions to individuals for purchasing, constructing, or renovating a residential property. The loan amount is typically repaid in the form of Equated Monthly Instalments over a fixed interval of time, which can range from a few years to a few decades.
A home loan consists of two main components:
- Principal Amount: The actual amount borrowed from the lender.
- Interest: The cost of borrowing, calculated as a percentage of the principal amount.
Key Tax Benefits on Home Loans
The Indian government offers various tax incentives on home loans to promote homeownership to the person who has taken the home loan, which plays a major role in providing financial assistance. There are some benefits as follows:
1. Tax Deduction on Interest Paid (Section 24(b))
Under Section 24(b) of the IT Act, you can avail of a deduction on the interest paid on your home loan. The benefits vary based on whether the property is self-occupied or let out:
- Self-Occupied Property:
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- Maximum deduction of up to ₹2,00,000 per financial year.
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- To claim this deduction, the construction or purchase of the property must be completed within the time period of five years from the end of the financial year in which the loan was taken.
- Let-Out Property:
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- There is no upper limit on the deduction for interest paid.
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- However, the overall loss from house property (including interest paid) that can be set off against other income is capped at ₹2,00,000 per financial year.
2. Tax Deduction on Principal Repayment (Section 80C)
Under Section 80C of IT Act, you can avail a deduction of up to ₹1,50,000 per financial year for the repayment of the principal component of your home loan. This limit is inclusive of other eligible investments under Section 80C, such as Provident Funds (PF), life insurance premiums, and Equity-Linked Savings Schemes (ELSS).
Conditions to Avail of This Benefit:
- The property must not be sold within the period of five years of possession; otherwise, the deduction claimed earlier will get reversed and added to your income in the year of sale.
- The deduction is available only for loans taken for the purchase or construction of a new house.
3. Additional Deduction Under Section 80EE
Section 80EE offers some extra deduction of up to ₹50,000 on the interest paid on home loans, subject to the following conditions:
- The loan amount should not exceed ₹35 lakh.
- The value of the property should not exceed ₹50 lakh.
- The loan must be sanctioned between the period of April 1, 2016, and March 31, 2017.
- The person should not own any other residential property at the time of loan sanction.
4. Additional Deduction Under Section 80EEA
Section 80EEA, introduced in Budget 2019, provides an additional deduction of up to ₹1,50,000 upon the interest paid on home loans for housing. Key conditions include:
- The stamp duty value of the property should not cross the value ₹45 lakh.
- The loan should be sanctioned between April 1, 2019, and March 31, 2022.
- The individual should not have any other residential property at the time of loan sanction.
- This benefit is available over and above the deduction under Section 24(b).
5. Tax Benefit on Joint Home Loans
When a home loan is taken jointly by one or more persons, each co-borrower can claim tax benefits separately, provided they are co-owners of the property and the contribution to the loan repayment will be distributed among them. The deductions available are as follows:
- Up to ₹2,00,000 on interest under Section 24(b).
- Up to ₹1,50,000 on principal repayment under Section 80C.
6. Tax Deduction on Stamp Duty and Registration Charges (Section 80C)
The cost of stamp duty, registration, and other expenses related to property transfer can also be claimed as a deduction under Section 80C, within the overall limit of ₹1,50,000.
How to Claim Home Loan Tax Benefits?
To get the various tax benefits on your home loan, follow these steps:
- Obtain a Loan Certificate: Request a home loan interest certificate from your lender. This document specifies the principal and interest amounts paid during the financial year.
- Declare in Form 12BB: If you are a salaried employee, submit Form 12BB to your employer along with the loan certificate to adjust your TDS (Tax Deducted at Source).
- File Your Income Tax Return (ITR): There is a need to mention the relevant deductions under Sections 24(b), 80C, 80EE, or 80EEA while filing your ITR.
- Keep Documentation Ready: Maintain proper documentation, including the loan agreement, property purchase deed, and payment receipts, as these may be required for verification.
Conclusion
Home loan tax benefits are a powerful tool to reduce your overall tax liability and make homeownership more financially viable, it reduces the lot of financial burden from the individual. By understanding the provisions under Sections 24(b), 80C, 80EE, and 80EEA, you can increase your savings amount and achieve your dream of owning a home.
Whether you’re a first-time buyer or looking to invest in a second property, staying updated about the latest tax laws and various other provisions is why it’s highly advisable to consult with a financial expert or professional advisor who can help you make the most of these benefits. Homeownership is not just about securing a roof over your head; it’s also a step towards financial stability and long-term wealth creation.
Frequently Asked Questions
1. Are there tax benefits for second home loans?
Yes, tax benefits can be claimed for a second home loan as well. The interest deduction under Section 24(b) is available without any upper limit for let-out properties, subject to the overall loss set-off limit of ₹2,00,000 per financial year. Principal repayment benefits under Section 80C are also available within the prescribed limit.
2. What happens if I prepay my home loan?
Prepayment of a home loan does not affect the tax benefits on the interest paid. However, the principal repayment benefit under Section 80C is subject to the overall limit of ₹1,50,000 per financial year.
3. Can I claim tax benefits on home improvement loans?
Yes, interest on loans taken for home improvement is eligible for deduction as per Section 24(b), subject to the cap of a maximum limit of ₹30,000 per financial year for self-occupied properties.
4. Are NRIs eligible for home loan tax benefits?
Yes, Non-Resident Indians (NRIs) can also claim tax benefits on home loans under Sections 24(b) and 80C, provided they file an income tax return in India.
