Tax Benefits on Home Loans

In today’s advanced space, owning a home is made easy with the help of home loans. These home loans come with strong financial commitments and discipline. Fortunately, the government offers various tax benefits to ease the burden of home loan repayments. This blog will explore these tax benefits in detail, by covering aspects like home loan structure, tax deductions on home loans, the impact of the new tax regime and more.

Understanding Home Loan Structure

Before learning about the tax benefits, one must first be aware of the structure of a home loan. Your Equated Monthly Instalment (EMI) consists of two parts:

1. Principal repayment: The amount of money that you have borrowed

2. Interest: The money that you are charged when you borrow

Both of these are important components for tax deduction eligibility and come under different sections of the Income Tax Act, of 1961.

Tax Benefits on Principal Repayment

According to Section 80C of the Income Tax Act, you can get tax deductions for the principal amount that you have repaid on your home loan. Here are some of the important conditions:

• Maximum deduction: Rs 1.5 lakh per fiscal year
• Eligibility: It is available only after the construction of the house is done
• Important condition: The deduction which you claimed will be re-added to your income in the selling year in case you go to sell the property within 5 years of its possession

Note that the Rs 1.5 lakh threshold under Section 80C is shared with other plans such as PPF, ELSS, and life insurance. Manage your investments wisely to experience the benefits of this tax deduction.

Tax Deduction on Home Loan Interest

Section 24(b) offers deductions as per the Income Tax Act on the interest paid on the home loan. Here's what you need to know:

• For self-occupied property: The maximum deduction of Rs 2 lakh per year
• For let-out property: Deduction has no upper limit
• Time limit: The construction must be finished within five years after the end of the financial year in which the loan was acquired.

When construction takes more than 5 years, you can claim deductions on home loan interest for acquisition, construction, repair, renewal, or reconstruction up to Rs. 30,000 only per year.

Pre-Construction Interest

What about the interest you pay before your house is built? The Income Tax Act has provisions for this too:

• Pre-construction interest can be deducted
• It is divided into 5 equal instalments.
• Applicable deductions will start from the year a property is acquired or the construction is completed
• In the case of a joint home loan, each borrower can avail deduction on home loan interest up to Rs 2 lakh under Sec 24(b) and a tax deduction on the principal repayment up to Rs 1.5 lakh under Sec 80C.
• This doubles the amount of deductions available when compared with a home loan taken by a single applicant.

Tax Benefits under Section 80EE

Under Section 80EE, first-time homebuyers get an additional deduction

• Maximum Deduction: Rs 50,000
• Loan amount: Rs 35 lakh or less
• Property value: Not more than Rs 50 lakh.
• Ownership: Should not own any other house on the date of loan sanction

This exceeds the Rs 2 lakh limit under Section 24(b).

Additional Deduction under Section 80EEA

Budget 2019 introduced Section 80EEA to further provide more incentives for affordable housing.

• Maximum deduction: Up to Rs 1.5 lakh
• Stamp value of property: Not exceeding Rs 45 lakh.
• Ownership: Must be a first-time homebuyer.

Note: Not available if deduction under Section 80EE is claimed

Tax Benefits for Joint Home Loans

A joint home loan can significantly enhance your tax benefits.

• Each co-owner can claim an interest deduction up to Rs 2 lakh under Section 24(b).
• Each can claim principal repayment deduction up to Rs 1.5 lakh under Section 80C
• Conditions: Co-owners of the property and co-borrowers of the loan.

Deduction for Stamp Duty and Registration Charges

One should not neglect the costs of property registration. This includes:

• Deductible under Section 80C
• Within the overall limit of Rs 1.5 lakh. Can be claimed only in the year that these expenses are incurred.

Summary of Home Loan Tax Benefits

The following is the breakdown that summarises the main tax benefits of home loans:

Loss under the Head House Property

In some cases, you may have a loss under the 'Income from House Property' head:

• Maximum set-off against other income: Rs 2 lakh per year
• Excess loss: Can be carried forward for eight years
• Future set-off: Only against income from house property

Conclusion

The home loan tax benefits in India are substantial, and your tax liability can come down by a significant amount. If you understand and avail all such benefits properly, you will go quite a distance toward bringing house buying within your reach. But tax laws keep changing and are also very complicated. Therefore, it is always advisable to seek the advice of a chartered accountant/any person expert in tax laws to get the maximum benefits within the existing statutory framework. Remember that though tax benefits are important, they can't turn into a single reason you decide to purchase a home. If you plan properly and make the decisions at the right time, you will be better positioned to reap some of the essential benefits accruable from being a homeowner while optimising for tax savings.

FAQs on Tax Benefits on Home Loans

1. How much tax benefit on a home loan I can get in India?

You can claim up to Rs 2 lakh on interest under Section 24(b) and up to Rs 1.5 lakh on principal repayment under Section 80C annually. 

2. Can I claim income tax benefit on home loan interest for an under-construction property?

Yes, you can claim a pre-construction interest in five equal instalments starting from the year the construction is completed, subject to the overall limit of Rs 2 lakh per year.

3. Are tax benefits available on a second home loan?

Yes, tax benefits are available on second home loans. You can claim interest deductions for up to two self-occupied properties, but the overall deduction limits remain the same.

4. Do NRIs get tax benefits on home loans in India?

Yes, NRIs can claim the same tax benefits as residents on home loans for properties in India, provided they file their tax returns in India.

5. What happens to my home loan tax benefits if I choose the new tax regime?

Under the new tax regime, most home loan tax benefits are not available except for interest deductions on let-out properties. It's advisable to compare both regimes to determine which is more beneficial for you.