Maximizing Tax Benefits on Home Loans: What You Should Know

Owning a home is a cherished dream for many, and home loans play a pivotal role in making this dream a reality. To encourage homeownership, the Indian government offers various tax deductions under the Income Tax Act of 1961 on the repayment of home loans. While home loans can be expensive, understanding the tax benefits available can help you maximize your savings. Here’s everything you need to know about income tax benefits on home loans.

Section 24 – Deduction for Interest Paid on Home Loan

Under Section 24 of the Income Tax Act, you can claim a tax deduction on the interest portion of your home loan EMI if the loan is taken for the construction or purchase of a house. For loans taken for house construction, the construction must be completed within five years from the date of loan approval. You can claim a maximum deduction of up to Rs. 2 lakh per year.

If the construction exceeds the five-year limit, the deduction on interest is capped at Rs. 30,000 per financial year. For let-out properties, there is no upper limit on the tax exemption for interest, meaning you can claim the entire interest paid.

Section 80C – Deduction on Principal Repayment

Section 80C allows a deduction on the principal portion of your home loan EMI, up to a maximum of Rs. 1.5 lakh per year. However, to claim this deduction, the property must not be sold within five years of possession. If you sell the property before this period, the deductions claimed will be added back to your income in the year of sale.

Deduction on Interest Paid During the Pre-Construction Period

If you are paying EMIs on a property that is still under construction, you may be eligible to claim a deduction on the interest paid during this period. Once the construction is complete, or if you have purchased a fully constructed property, you can claim this deduction.

The Income Tax Act allows you to claim a deduction for pre-construction interest in five equal installments, starting from the year the property is acquired or construction is completed. This deduction is capped at Rs. 2 lakh. Additionally, if your home loan qualifies under Section 80EEA, you can claim an additional deduction of Rs. 1.5 lakh over and above the Rs. 2 lakh limit under Section 24(b).

Deduction for Registration and Stamp Duty Charges

You can also claim a deduction for registration and stamp duty charges under Section 80C, with the amount capped at Rs. 1.5 lakh. However, this deduction can only be claimed in the year these expenses are incurred.

Section 80EE and 80EEA – Additional Deductions

Sections 80EE and 80EEA provide additional deductions for homebuyers, up to a maximum of Rs. 50,000 under Section 80EE, and Rs. 1.5 lakh under Section 80EEA, subject to certain conditions. To claim these deductions:

  1. The loan amount must be Rs. 35 lakh or less.
  2. The property value should be Rs. 50 lakh or less.
  3. The individual should not own any residential house property on the date of loan sanction.

Section 80EEA, introduced in Budget 2019, was designed to boost the housing sector. To qualify, the stamp duty value of the property must be Rs. 45 lakh or less, and you must not own any other residential property at the time of loan sanction. It’s important to note that you cannot claim deductions under both Section 80EE and 80EEA simultaneously.

Joint Home Loan Deduction

Taking a joint home loan with immediate family members, such as parents, siblings, or a spouse, allows each loan holder to claim individual deductions. For home loan interest, each co-borrower can claim a deduction of up to Rs. 2 lakh under Section 24(b). Similarly, under Section 80C, each can claim up to Rs. 1.5 lakh for principal repayment. Additionally, joint holders may also qualify for deductions under Section 80EEA, up to Rs. 1.5 lakh each, provided all other conditions are met.

Read More: Understanding the Double Taxation Avoidance Agreement (DTAA)

Tax Benefits and the New Tax Regime

It’s crucial to note that these tax benefits are not available under the new tax regime. If you opt for the new tax regime, deductions for interest on self-occupied house property (Section 24(b)), as well as deductions under Sections 80C, 80EE, and 80EEA, are not permitted. However, for let-out properties, you can still claim a deduction under Section 24(b), but only up to the taxable amount of rent after accounting for a 30% standard deduction.

Home loans offer significant tax benefits, particularly under the old tax regime. By carefully leveraging these deductions, you can enhance your savings and improve your financial planning. Understanding the various provisions can help you make the most of your home loan and ensure that your investment in property is financially rewarding.

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