Home Loan Tax Benefit- A Guide to Saving Tax on Home Loans

According to the guidelines of the Income Tax Act of 1961, obtaining a house loan may present chances for tax savings. Provisions in the most recent financial budget improved these advantages even more. In the recent budget, the Union Finance Minister suggested extending the deadline for further deductions on housing loan interest payments. After being extended until March 31, 2022, the deadline has been rescheduled for March 31, 2024. This postponement applies to all house loans approved before March 31, 2022.

Most home buyers do not rely on personal savings to buy homes. Rather, they depend on borrowing a home loan. Even though getting a loan can be expensive, several tax deductions can result in annual savings. It's critical to comprehend how to optimise these advantages. In this guide, we will share actionable insights into saving income tax on home loans.

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Table of Content

Tax Benefit on Home Loan

Section 80C: Deduction on principal repayment 

Section 24b: Deduction for interest paid on home loan

Deduction on interest paid during the pre-construction phase

Section 80EE: Additional Deduction

Section 80C: Deduction for stamp duty and registration charges

Section 80EEA: Additional deduction

Deduction for Joint Home Loan

Budget 2023 Updates

Tax-Saving Tips to Maximise Your Deductions on Home Loans

Most Asked Questions

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Tax Benefit on Home Loan

A home loan is eligible for deductions under three separate sections of the IT Act. Principal and interest are the two components of a house loan. According to income tax regulations, you may be able to deduct repayment of these two components. Let's examine these areas on home loan tax benefits in more detail:

Section 80C: Deduction on principal repayment 

According to Section 80C, the annual principal paid on the EMI of the home loan is deductible. A claim may be made for a maximum of Rs 1.5 lakh. However, the home property must not be sold within five years of ownership in order to be eligible for this deduction. If not, your income in the year of sale will be increased by the deduction you previously claimed.

Section 24b: Deduction for interest paid on home loan

To be eligible for a tax deduction, a home loan must be taken out for the building or purchase of a residence. If the loan is being used to build a house, it needs to be finished within five years of the end of the fiscal year in which it was obtained.

Under Section 24, you may deduct up to Rs 2 lakh in interest from your total income for the year that you paid on your home loan installments. The maximum deduction for interest paid on self-occupied residential property is Rs 2 lakh as of the assessment year 2018–19.

You can deduct the whole amount of interest paid on your house loan since there is no upper limit when it comes to let-out property tax exemptions. You can only deduct up to Rs 30,000 in home loan interest during a given financial year if construction takes longer than the allotted five years. The whole loss, however, may only be claimed up to Rs 2 lakh under the heading "Income from House Property" against any other head of income. This deduction is available starting in the year that the house's construction is finished.

Deduction on interest paid during the pre-construction phase

At times, people buy an under-construction property and begin paying the EMIs even before moving in. In this scenario, you can claim a deduction on the interest on the home loan only when the construction is completed. However, you can still make the most of the deduction provisions during this period. 

The pre-construction interest is one type of interest that can be deducted under the Income Tax Act. In addition to the deduction you are normally entitled to take from your house property income, you may also deduct an additional amount in five equal installments beginning in the year the property is acquired or construction is finished. The maximum eligibility is still limited to Rs 2 lakh, though.

For instance, you pay interest of Rs 20,000 per month on a house loan that you obtained for construction. After two years, the house's construction was finished in 2019. Therefore, only after the construction is finished and paid for in five equal installments beginning in 2019 can you begin to claim the pre-construction interest of around Rs 2.4 lakh that you paid. 

The maximum interest deduction allowed by Section 24(b) is Rs 2 lakh, which includes both pre-construction and current-year interest. On the other hand, you are allowed to deduct an extra Rs 1.5 lakh if your house loan qualifies for deductions under Section 80EEA. 

Section 80EE: Additional Deduction

Homebuyers are eligible for an additional deduction under Section 80EE, up to a maximum of Rs 50,000. The following requirements must be fulfilled in order to claim this deduction: 

• The property's worth should not exceed Rs 50 lakh, and the loan amount should be no more than Rs 35 lakh.

• The loan had to be approved between April 1, 2016, and March 31, 2017. 

• Additionally, the borrower must be a first-time homeowner and have no other properties on the day the loan was sanctioned. 

Section 80C: Deduction for stamp duty and registration charges

In addition to the principal repayment deduction, Section 80C allows for the deduction of stamp duty and registration fees, up to a total of Rs 1.5 lakh. It can only be claimed, nevertheless, in the year that these costs are spent.

Section 80EEA: Additional deduction

Budget 2019 has added an extra deduction under Section 80EEA for homebuyers, up to a maximum of Rs 1.5 lakh, to encourage the housing sector. The requirements listed below must be fulfilled to claim this deduction: 

• The property's stamp value is not more than Rs 45 lakh. 

• The loan must have been approved between April 1, 2019 and March 31, 2022 (with an extension through March 31, 2021). 

• The borrower is a first-time home buyer who does not own any other homes as of the loan sanction date. 

If a person claims a deduction under this section, they should not be eligible to claim a deductions under Section 80EEA.

Deduction for Joint Home Loan

Co-owners benefit when it comes to joint home loans because they can deduct more money. Depending on their respective shares in the loan and the property, each co-owner may claim these deductions on their own. They must also be co-owners of the property that was borrowed to be eligible for this deduction. So, you may be able to claim a bigger tax benefit if you take out a loan jointly with your family.

Budget 2023 Updates

The 2023–2024 Union Budget maintained tax breaks for developers and homeowners. The aim is to provide further support for affordable housing. Important highlights include: 

• Interest discounts on loans for affordable housing will be extended through March 2024.

• Up to March 2024, affordable housing developments will continue to receive tax vacations. 

• Putting up tax incentives for projects aimed at providing affordable rental housing to meet the housing demands of migrant workers. 

• Pradhan Mantri Awas Yojana was given Rs. 48,000 crores, demonstrating the government's commitment to programmes promoting affordable housing.

Tax-Saving Tips to Maximise Your Deductions on Home Loans

Here are a few tips to maximise your deductions on home loans:

• Any fees a bank charges to provide its services are tax deductible and included in the loan amount. Processing fees assessed on loans are included in service charges. The bank typically charges processing costs to borrow money. Tax deductions apply to processing fees and other costs a bank imposes in order to provide its services. Section 24 of the Income Tax Act allows for the claim of this as an interest expenditure as well. Nevertheless, no amount may be deducted for commission or brokerage fees paid to third parties (mostly your CAs) for arranging the loan.

• Up to Rs. 1,50,000 in stamp duty and registration fees paid at the time of home purchase may be claimed under section 80C. These expenses are deductible from taxes at any point during the year of payment, regardless of whether a loan has been taken out or repaid. This is in contrast to tax deductions for principal repayment of home loans, which are only available once the house is completed.

• If your spouse is an earning member and is applying for a loan, this could be a suitable tax planning strategy. When earning members apply for loans under joint names, they each enjoy benefits of up to Rs. 2 lakh under Section 24 and Rs. 1.5 lakh under Section 80C. In addition, they receive an increased credit limit based on their combined earnings. Nearly all of the revenue received is preserved. Therefore, save more money in order to earn more money.

In conclusion, making a big-ticket purchase like a home is seldom possible without borrowing. However, a large home loan should not be seen as a huge liability. You can use it to your advantage by claiming hefty tax deductions, provided you understand the rules and norms of the Income Tax Act. 

FAQ

Q1. Who is eligible to claim the benefits of tax deductions on home loans? 

There is a single, fundamental criterion that applies to all income tax sections in order to be eligible for the tax advantage on a house loan. You have to be the bearer of both titles—that is, the loan holder and the owner of the real estate. These benefits are not available to those who are merely owners or debtors. On the other hand, you might be a co-borrower or co-owner. Thus, if you are considering purchasing a house in your wife's name and deducting the interest from your earnings, you will regrettably not receive any tax benefits. In general, the only people eligible to claim tax benefits on a home loan are individuals or members of Hindu undivided families. No body corporation, partnership firm, or company is eligible for this deduction.

Q2. How much tax benefit can I get on a home loan?

The following is a list of the tax benefits associated with home loans according to various Income Tax Act sections:

• For a self-occupied home, up to Rs 2 lakh under Section 24(b)

• Up to Rs 1.5 lakh under Section 80C

Q3. Which home loan grants are available to first-time home buyers? 

First-time buyers are eligible for additional deductions under section 80EE of INR 50,000 for home loan interest, section 80C for stamp duty payment, and section 24 for principle repayment and interest deduction.

Q4. Are there any tax benefits on a second home loan?

Indeed. It will be deemed self-occupied if the first residence is occupied and the second is unoccupied. In this situation, the interest paid on both homes may be written off as tax deductible. But it can't be more than Rs 2 lakh. You are required to report the rental income from the second property if it is rented out while the first is occupied by the owner. From there, you can deduct the paid municipal taxes, the interest on your house loan, and the standard deduction of 30%.

Q5. Can my spouse, when we jointly purchase a home, get an income tax deduction? 

When your spouse works and has a distinct income stream, they are eligible to claim different deductions on their IT returns. Under Section 80C, you both may deduct up to Rs 1.5 lakh from your combined income. You and your spouse are each eligible to deduct up to Rs 2 lakh from the interest paid on your home loan if you own the property jointly.

Q6. Can I get tax benefits if I use a home loan to buy a property even though it's still under construction? 

Tax deductions are not available until the house's construction is finished. After construction is finished, you will be able to claim the total interest paid for the time leading up to the year you take possession in five equal installments starting in the year the building is finished.

Q7. Can I claim tax benefits on a mortgage that I took out to renovate my house? 

Yes, up to a maximum of Rs. 30,000 annually, tax benefits on a house loan taken out for property renovations may be claimed under Section 24 of the Income Tax Act, 1961.

Q8. How can I get my home loan's tax benefits? 

The steps to obtaining home loan benefits are listed below:

• Have all of your paperwork available, including proof of ownership, loan information, a bank certificate detailing the principal and interest, and receipts for paid municipal taxes. 

• If you are a salaried employee, provide these documents to your employer for the TDS adjustment. You are not required to turn in the paperwork to anyone if you work for yourself. 

• Determine how much money you make from your home. 

• To claim a deduction for principal repayment and interest on your home loan, file your ITR.