Tax Benefit on Home Loan

5paisa Research Team Date: 10 Apr, 2024 02:00 PM IST


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Owning a home is a dream for many. However, buying a house puts a lot of financial pressure on many individuals.The government aids this by offering tax benefits under the Income Tax Act of 1961. Understanding these benefits is crucial for saving on taxes.

To encourage property investment, exemptions and deductions are provided. Home loan borrowers can save up to Rs. 1.5 lakh on principal repayment (Section 80C) and up to Rs. 2 lakh on interest payment (Section 24(b)). Note that those under the new tax regime cannot claim these deductions.

Tax Benefits on Home Loan (FY 2023-24)

A home loan repayment comprises two elements: the principal amount and the interest paid on the borrowed sum. Section 80C and 24(b) of the Income Tax Act of 1961 offer tax benefits for both these components. Understanding all the home loan tax benefits is crucial during tax preparation for a financial year. 

These sections and their corresponding deductions have been thoroughly discussed in this article.

Section of Income Tax Act

Nature of Tax Deduction

Maximum Rebate (INR)

Section 80C

Tax Deduction on Principal Repayment

Up to Rs.1,50,000

Section 24B

Tax Deduction on Interest Paid

Up to Rs.2,00,000

Section 80 EE

Tax Deduction on Interest Paid

Up to Rs.50,000

Section 80EEA

Tax Deduction on Interest Paid

Up to ₹ 150000

For Joint Home Loan

Tax Deduction on Interest Paid and Tax Deduction on the principal repayment

Up to ₹ 2,00,000 u/s 24b
Up to ₹ 150000 u/s 80c

New Updates (Union Budget 2023-2024)

• The eligibility period for claiming an additional deduction for interest of Rs.1.5 lakh paid for loans taken to purchase affordable houses has been extended until 31 March 2022.
• Tax holiday eligibility for affordable housing projects has been extended by another year, with the new deadline set for 31 March 2023.
• A new tax exemption has been proposed for notified Affordable Rental Housing Projects to bolster the supply of affordable rental housing for migrant workers.
• While there were no significant changes regarding deductions under home loans, notable news includes the allocation of Rs.48,000 crore to the Pradhan Mantri Awas Yojana (PMAY).

Tax Deduction on Principal Repayment

Under Section 80C of the Income Tax Act, you can avail of a deduction of up to Rs. 1.5 lakh on the repayment of the home loan principal amount. This includes stamp duty and registration fees but can only be claimed once in the same year they were incurred.

The home loan must be taken for the purchase or construction of a new house. However, if you sell the property within five years from the end of the year in which it was bought, any benefits claimed under Section 80C will be reversed and added to your income in the year of sale. 

Tax Deduction on Home Loan Interest Payment under Section 24(b)

Under Section 24(b) of the Income Tax Act, home loan tax benefits can be claimed on the interest paid on your home loan. For a self-occupied house, the maximum rebate allowed annually is Rs. 2 lakh from your gross income. However, if the house isn't constructed within three years from the fiscal year's end in which the loan was taken, only Rs. 30,000 can be claimed. This deduction can be claimed yearly, even if no payments were made during that year. In case the loan is for repair or reconstruction, no tax benefits can be claimed on the interest paid. However, if the interest for a purchase or construction loan is paid before completion, the average amount can be deducted in five equal installments over five financial years. Additionally:

• The deduction applies to both self-occupied and vacant residential properties.
• There's no cap on tax deduction for let-out or rented residential properties.
• The deduction is applicable for home loans taken on or after 01-04-1999.
• The property's acquisition or construction must be completed within 5 years from the end of the financial year in which the housing loan was taken.
• The deduction for interest on borrowed capital is limited to Rs. 30,000 under certain conditions:
        ◦ If the home loan is taken before 01-04-1999 for buying or constructing a house property.
        ◦ If the home loan is availed on or after 01-04-1999 for reconstructing, repairing, or renewing a house property.
        ◦ If the home loan is taken on or after 01-04-1999 but construction of the house property is not completed within five years.

Tax Benefits under Section 80EE

Under Section 80EE of the Income Tax Act, first-time home buyers can avail of additional deductions of up to Rs. 50,000. This section is applicable for loans sanctioned until 31st March 2017 only. To claim this home loan tax benefit, certain conditions must be met:

• The loan amount should be Rs. 35 lakh or less, and the property's value should not exceed Rs. 50 lakh.
• The loan must have been sanctioned between 1st April 2016 and 31st March 2017.
• At the time of loan sanction, the individual must not own any other house, making them a first-time house owner.
• Please note that Section 80EE was reintroduced but is valid only for loans sanctioned until 31st March 2017.

Tax Deduction on Home Loan Interest for Affordable Housing under Section 80EEA

Section 80EEA, introduced in the Union Budget 2019 to boost affordable housing, allowed first-time homebuyers to claim a tax deduction of up to Rs. 1.5 lakh on interest paid for affordable housing loans. However, this deduction is no longer available for home loans sanctioned on or after 1st April 2022, as benefits were applicable only until 31st March 2022. To claim this benefit, certain conditions must be met:

• The housing loan should have been taken between April 1, 2019, and March 31, 2022.
• The stamp duty value of the residential house property should not exceed Rs. 45 lakh.
• You should not own any residential house property on the date of loan sanction.
• You should not be eligible to claim a deduction under Section 80EE of the Income Tax Act.

Deduction for Joint Home Loan

If you have a joint home loan account, each borrower can individually claim home loan tax benefits on their taxable income. Here's how:

◦ Interest Payment: Each borrower can claim tax benefits of up to Rs. 2 lakh on the interest paid. This falls under Section 24(b) and will be proportional to the percentage ownership of each co-applicant.
◦ Principal Repayment: Co-owners can claim a deduction of up to Rs. 1.5 lakh against the amount paid towards the principal. The only requirement is that they must be co-owners of the property to claim these home loan tax benefits.

For instance, if two individuals apply for a joint home loan, they can each claim up to Rs. 1.5 lakh and Rs. 2 lakh on their principal and interest payments, respectively. If both applicants are first-time homebuyers, they can additionally claim up to Rs. 1.5 lakh each, resulting in a combined tax benefit of up to Rs. 10 lakh, provided they meet the eligibility criteria. Similarly, if they wish to claim additional benefits under Section 80EEA of the Income Tax Act, the same principle applies.

Moreover, adding a co-applicant increases your eligibility for a higher loan amount. Lenders consider the repayment capacity and credit scores of all co-applicants, making it advantageous to apply jointly.

Home Loan Tax Benefits of Owning a Second Property

When the first home is self-occupied and the second home is vacant, both properties are considered self-occupied for tax purposes. In this scenario, tax deduction can be claimed on the interest paid for both houses, but it cannot exceed Rs. 2 lakh in total.

However, when the first home is self-occupied and the second one is rented out, you must declare the rental income of the second property. From this rental income, you can deduct the standard deduction of 30%, along with interest on the home loan and municipal taxes paid, before calculating your taxable rental income.

How to Calculate Tax Benefits on Home Loan?

The simplest method to compute home loan tax benefits is through an online calculator. Just input the following details: Loan Amount, Tenure, Interest Rate, Loan Start Date, Gross Annual Income, and Existing Deductions Under Section 80C. After clicking "Calculate," you'll receive a comprehensive breakdown.

In conclusion, understanding the nuances of home loan tax benefits is essential for every homeowner. Whether it's maximizing deductions on principal and interest payments, navigating the complexities of multiple property ownership, or leveraging online calculators for accurate computations, informed decision-making can significantly impact financial well-being. By staying abreast of tax regulations and utilizing available tools, individuals can optimize their tax savings while enjoying the security and fulfillment of homeownership.

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Frequently Asked Questions

Individuals are eligible to claim a tax deduction of up to Rs. 2 lakh on the interest paid on their home loan and up to Rs. 1.5 lakh on the principal repayment. Consequently, a total deduction of up to Rs. 3.5 lakh can be claimed in a financial year.

If the property is sold within 5 years of possession, any tax deductions previously claimed will be reversed. However, the tax exemption on interest paid will remain unaffected.

Yes, both you and your spouse can individually claim deductions up to the limit of Rs. 3.5 lakh each in a financial year, effectively doubling the tax benefit. However, to qualify for this benefit, your spouse must be a co-owner of the property.