Combine Home Loan and NPS for ₹2.5L Tax Benefit
- PRITI SIRDESHMUKH
- Sep 19
- 9 min read
Investing in a home is not only a significant financial milestone but also an opportunity to optimize tax savings. The Income Tax Act provides several provisions that allow taxpayers to claim deductions on both the principal and interest components of a home loan, as well as contributions to the National Pension System (NPS). These deductions can substantially reduce taxable income and lower overall tax liability. Understanding how these benefits work and combining them strategically can help individuals maximize their tax savings while building long-term wealth. This article breaks down the various sections under which taxpayers can claim deductions, key considerations, and how platforms like TaxBuddy simplify the process.
Table of Contents
How Home Loan Tax Benefits Work
Home loans provide significant tax advantages under the Indian Income Tax Act, making them an essential part of financial planning for homeowners. Tax benefits are primarily available on two components of a home loan: the principal repayment and the interest payment. The principal repayment portion qualifies for deductions under Section 80C, while interest payments are eligible for deductions under Section 24(b). These provisions allow taxpayers to reduce their taxable income, thereby lowering overall tax liability.
For first-time homebuyers, additional benefits are available under certain conditions, including extra deductions on interest payments for newly constructed or purchased homes. Understanding how these deductions work and the interplay between principal and interest components is critical for optimizing tax benefits. Planning repayments strategically can also help in effective tax planning, ensuring maximum relief without violating compliance requirements. Homeowners can claim these deductions whether the property is self-occupied or rented, provided all eligibility conditions are met.
Principal Repayment Deduction Under Section 80C
The principal repayment portion of a home loan qualifies for tax deductions under Section 80C of the Income Tax Act, with a maximum limit of ₹1.5 lakh per financial year. This limit includes other eligible investments and expenses under Section 80C, such as life insurance premiums, Employee Provident Fund contributions, and tax-saving fixed deposits, so homeowners must plan carefully to maximize benefits.
This deduction applies to both self-occupied properties and rented properties, provided the home loan is taken from a recognized financial institution or bank. For newly constructed or purchased properties, the property must meet specific conditions, including registration in the taxpayer's name and adherence to construction or possession timelines. Taxpayers must maintain proper documentation, such as loan sanction letters, repayment statements, and property ownership papers, to claim deductions accurately.
By claiming this deduction, the taxable income of the taxpayer is reduced directly, leading to substantial tax relief over the course of the loan tenure. It also encourages timely repayment of the principal portion, supporting both financial discipline and effective tax management.
Interest Payment Deduction Under Section 24(b)
Section 24(b) of the Income Tax Act allows taxpayers to claim a deduction on the interest paid on a home loan. For self-occupied properties, the maximum deduction available is ₹2 lakh per financial year. This deduction is applicable only to the interest component of the home loan and not to the principal repayment, which is covered separately under Section 80C. The deduction helps reduce the taxable income of individuals, providing significant relief for homeowners.
For rented properties, the rules differ slightly. While there is no upper limit on the interest deduction for rental properties, the overall loss from house property that can be set off against other income in a financial year is capped at ₹2 lakh. Any excess loss can be carried forward for up to eight subsequent years to offset against income from house property in those years.
To ensure a smooth and accurate tax filing process, taxpayers must obtain and verify interest certificates from their banks or lenders. These certificates should match the interest figures reported in their loan statements to avoid discrepancies that could delay filing or cause notices from the Income Tax Department.
Additional Deduction for First-Time Homebuyers
First-time homebuyers are eligible for an additional deduction under Section 80EEA. This deduction allows up to ₹50,000 over and above the ₹2 lakh limit under Section 24(b). However, it is applicable only if the home loan is sanctioned within the specific period set by the government and meets certain conditions, such as the value of the property not exceeding the prescribed limit and the taxpayer not owning any residential property at the time of loan sanction.
This additional deduction is designed to encourage affordable housing by reducing the financial burden on new homeowners. By combining the benefits of Section 24(b) and Section 80EEA, first-time homebuyers can significantly lower their taxable income and improve their cash flow, making homeownership more accessible and financially manageable.
National Pension System (NPS) Tax Benefits
Investing in the National Pension System (NPS) not only helps individuals plan for a financially secure retirement but also offers significant tax-saving opportunities under the Income Tax Act. Contributions made to the NPS are eligible for deductions under Sections 80CCD(1) and 80CCD(1B). These provisions allow taxpayers to reduce their taxable income while simultaneously building a retirement corpus. NPS becomes especially beneficial for individuals looking to maximize tax benefits beyond the standard Section 80C limit, making it a strategic tool for integrating retirement planning with other financial goals, such as home loan repayments or long-term investments.
Section 80CCD(1) Deduction
Under Section 80CCD(1), taxpayers can claim deductions for contributions to the NPS up to 10% of their salary if they are salaried individuals, or up to 20% of their gross income if they are self-employed. However, this deduction is counted within the overall Section 80C limit of ₹1.5 lakh for a financial year. By leveraging this deduction, taxpayers can significantly lower their taxable income while steadily accumulating a retirement fund that will provide financial stability in later years.
Additionally, contributions under Section 80CCD(1B) allow for an extra deduction of up to ₹50,000 beyond the 80C limit, further enhancing the tax efficiency of investing in NPS. Over time, this dual advantage of retirement savings and tax benefits makes NPS an attractive and disciplined investment choice for long-term financial planning..
Additional Deduction Under Section 80CCD(1B)
Section 80CCD(1B) allows an extra deduction of up to ₹50,000 specifically for NPS contributions, over and above the Section 80C limit. This additional deduction is particularly beneficial for maximizing tax savings without affecting other eligible deductions under 80C.
Combining Home Loan and NPS for Maximum Tax Savings
By strategically combining deductions under Sections 80C, 24(b), and 80CCD, taxpayers can maximize their overall tax benefits. For example, claiming principal repayment under 80C, interest payment under 24(b), and NPS contributions under 80CCD(1B) ensures optimal utilization of all available deductions. Proper planning and record-keeping are essential to ensure compliance and avoid errors during tax filing.
Important Considerations for Bank Account and KYC Details
Accurate bank account and KYC details play a pivotal role when claiming deductions under various provisions of the Income Tax Act. For instance, payments made toward the principal or interest of a home loan, or contributions to the National Pension System (NPS), must be processed through verified bank accounts. This ensures that all transactions are traceable and align with the documentation requirements set by lenders, NPS intermediaries, or the Income Tax Department. Additionally, having PAN-linked and KYC-compliant accounts is essential because these details are used to validate your claims while filing your Income Tax Return. Incomplete or incorrect bank and KYC information can lead to mismatches in your return, resulting in delays in refund processing, the need for manual verification, or even notices from the tax authorities. Properly maintained records, such as bank statements, loan certificates, and NPS account statements, help prevent such issues and support smooth and timely processing of tax benefits.
How TaxBuddy Simplifies Claiming Home Loan and NPS Benefits
TaxBuddy simplifies the process of claiming deductions on home loans and NPS contributions by providing an integrated and guided platform. The system consolidates all relevant information, including bank statements, loan certificates, and NPS account details, and automatically calculates the eligible deductions under Sections 80C, 24(b), and 80CCD. This eliminates the need for manual computation and reduces the likelihood of errors that may arise while preparing returns independently. The platform walks users through every step of the filing process, ensuring that each claim is accurately reported, while also maximizing tax savings. Additionally, TaxBuddy’s mobile app offers the convenience of filing returns from anywhere, enabling users to validate their claims with expert-backed guidance and secure submission. By combining automation with clear instructions, TaxBuddy makes claiming deductions efficient, accurate, and hassle-free, saving time and reducing the risk of discrepancies that could affect refunds.
Conclusion
Home loan and NPS tax benefits provide significant opportunities to reduce taxable income and optimize financial planning. Understanding the various sections and combining deductions strategically can maximize savings. For anyone looking for assistance in tax filing, it is highly recommended to download theTaxBuddy mobile app for a simplified, secure, and hassle-free experience.
FAQs
Q1. Can both principal and interest of a home loan be claimed for tax deductions? Yes, taxpayers can claim deductions for both the principal and interest components of a home loan, but under different sections. The principal repayment qualifies for deduction under Section 80C, up to ₹1.5 lakh per financial year. Interest paid on the home loan is eligible for deduction under Section 24(b), up to ₹2 lakh per financial year for a self-occupied property. Combining these allows significant tax savings, provided the home loan is for a residential property and meets the conditions set by the Income Tax Act.
Q2. What is the maximum deduction available under Section 80C for principal repayment? Under Section 80C, the maximum deduction available for principal repayment of a home loan is ₹1.5 lakh in a financial year. This limit is shared with other eligible investments and payments under 80C, such as PPF, NSC, ELSS, life insurance premiums, and children’s tuition fees. Careful planning is required to maximize this limit efficiently without exceeding the overall 80C cap.
Q3. How much interest can be claimed under Section 24(b) for self-occupied property? For a self-occupied property, the interest component of a home loan is eligible for deduction under Section 24(b) up to ₹2 lakh per financial year. If the property is let out, there is no upper limit, although the loss that can be claimed against other income is capped at ₹2 lakh per year, with the remaining loss carried forward for future years.
Q4. Are first-time homebuyers eligible for any additional deductions? Yes, first-time homebuyers can avail of an additional deduction of ₹50,000 under Section 80EEA for interest paid on home loans sanctioned by a financial institution. This is over and above the standard deduction of ₹2 lakh under Section 24(b), provided the loan and property meet eligibility conditions, such as loan amount and property value limits.
Q5. How does NPS contribution help in tax savings? Contributions to the National Pension Scheme (NPS) provide tax benefits under two sections:
Section 80C: Up to ₹1.5 lakh including other eligible 80C investments.
Section 80CCD(1B): Additional deduction of up to ₹50,000 for NPS contributions. These deductions reduce taxable income directly, making NPS a powerful tool for retirement planning and tax optimization.
Q6. What is the additional deduction under Section 80CCD(1B)? Section 80CCD(1B) allows an extra deduction of ₹50,000 specifically for NPS contributions. This is over and above the ₹1.5 lakh limit under Section 80C, allowing taxpayers to increase overall deductions while saving for retirement. It applies to both salaried and self-employed individuals.
Q7. Can deductions under home loan and NPS be combined? Yes, deductions can be combined. A taxpayer can claim:
Principal repayment under Section 80C (up to ₹1.5 lakh)
Interest on home loan under Section 24(b) (up to ₹2 lakh for self-occupied property)
Additional NPS contribution under Section 80CCD(1B) (up to ₹50,000) Combining these ensures maximum tax benefit while adhering to the Income Tax Act provisions.
Q8. Are there any specific bank account or KYC requirements to claim deductions? Yes, the payments should be made through verifiable channels like bank transfers, cheques, or online modes. For NPS contributions, maintaining proper KYC compliance with a valid PAN, bank account, and Aadhaar linking is mandatory. Similarly, for home loan deductions, the loan account must be active with correct details reflected in Form 16 or lender statements.
Q9. How can TaxBuddy simplify claiming home loan and NPS benefits? TaxBuddy automates the process by integrating your loan and investment details, including Form 16 and NPS statements, directly into the ITR form. It ensures all eligible deductions under Section 80C, 24(b), and 80CCD(1B) are correctly claimed, reduces human error, and provides a step-by-step guided filing process for a seamless experience.
Q10. Does TaxBuddy support filing for both salaried and self-employed taxpayers? Yes, TaxBuddy offers self-filing and expert-assisted options for all types of taxpayers. Salaried individuals, business professionals, freelancers, and self-employed taxpayers can use the platform to report income, claim deductions, and file ITR with full compliance and accuracy, including deductions for home loans and NPS contributions.
Q11. Can I claim deductions for rented property home loan interest? Yes, for a rented property, the entire interest paid on a home loan can be claimed as a deduction against rental income under Section 24(b). However, the overall loss that can be set off against other income is limited to ₹2 lakh per financial year, with any remaining loss carried forward for up to 8 assessment years.
Q12. Is it necessary to maintain loan and NPS receipts for ITR filing? Yes, maintaining proper documentation is essential. Bank statements, loan statements, NPS contribution receipts, and lender-issued certificates act as proof of payments and are required for accurate ITR filing and in case of an Income Tax Department scrutiny. Digital copies can also be submitted when using platforms like TaxBuddy to ensure smooth verification and claim validation.
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