Income Tax Benefit on Home Loan

Rashmita Choudhary
9 hours ago
9 min read

Every person's dream is to own a home. Under the Income Tax Act of 1961, sometimes known as "the Income Tax Act," the government offers a number of tax advantages on house loans to entice people to invest in real estate. Understanding all of the tax benefits associated with home loans is crucial because it can help with tax planning and significantly reduce your tax obligations. Principal and interest payments are both included in a home loan. In this article, we will explain how to maximise the income tax benefit on your home loan.

Income Tax Benefit on Home Loan

Home Loan Tax Benefit under Section 80C

Home Loan Tax Benefit Additional Deduction under Section 80EE

Home Loan Tax Benefit Additional Deduction under Section 80EEA

Home Loan Interest Tax Benefit under Section 24

Home Loan Interest Benefit on Multiple Properties

Interest Paid During Pre-Construction Phase

New Tax Regime’s Impact on Home Loan Benefits

Conclusion

Frequently Asked Questions

Income Tax Benefit on Home Loan

There are three separate parts of the IT Act under which a house loan is eligible for deductions. A home loan comprises two components, namely principal and interest. According to income tax regulations, deductions can be claimed upon repayment of both of these components. Let's examine these aspects of the house loan calculator in more detail:

Home Loan Tax Benefit under Section 80C

You can deduct taxes from the principal amount you pay back to your lender under Section 80C of the IT Act. This discount also applies to your home's stamp duty and registration fees. Under Section 80C, a house loan may be excluded from taxes up to Rs. 1.5 lakhs throughout a fiscal year. Keep in mind that section 80C also makes a number of other investment options eligible, including PPF, tax-saving FD, and ELSS funds. The Rs. 1.5 lakh deduction cap would not change, even if you have invested in such products.

Home Loan Tax Benefit Additional Deduction under Section 80EE

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

The value of the property cannot exceed Rs 50 lakh, and the loan amount must be Rs 35 lakh or less.
The loan had to be approved between April 1, 2016, and March 31, 2017.
Additionally, the person was a first-time home owner and had no other residences on the day the loan was approved.

Home Loan Tax Benefit Additional Deduction under Section 80EEA

A further deduction of up to Rs 1.5 lakh for home buyers under Section 80EEA was hailed in the 2019 Budget to support the housing sector in the country. The requirements listed below must be fulfilled in order to claim this deduction:

The property's stamp value is no more than Rs 45 lakh.
The loan has to be approved between April 1, 2019, and March 31, 2022 (extended from March 31, 2021).
The person, who is a first-time home buyer, had no other homes on the date the loan was approved.

Home Loan Interest Tax Benefit under Section 24

A home loan must be taken out for the purpose of building or buying a property in order to qualify for the Section 24 home loan interest tax deduction. The project must be finished within five years after the end of the fiscal year in which the loan was approved if it is for construction. The deduction for interest paid on a rental property is unlimited. The full amount of interest paid on a house loan can be deducted from taxes by borrowers. For properties that are self-occupied, the interest component may be deducted up to Rs 2 lakh. There is no limit on the exemption that can be claimed for interest on let-out property. The full amount of interest paid on your home loan is deductible.

Home Loan Interest Benefit on Multiple Properties

To optimise your interest deduction, you can decide which of your homes should be treated as self-occupied and which as a rental. For instance, if

Property X: Home loan interest payment of Rs. 1.5 lakh.
Property Y: Home loan interest payment of Rs. 2.5 lakh.

Since there is no limit on interest deductions for properties that are let out, it is preferable to consider Property B as a let-out property. You will lose out on Rs. 50,000 and be restricted to Rs. 2 lakh if you treat Property B as self-occupied. Make an informed decision to get the biggest deduction possible.

Interest Paid During Pre-Construction Phase

Assume you have not yet moved into the property you purchased while it was still under construction, but you are still making your EMI payments. In this case, may only claim the deduction once the construction is complete. Interest paid prior to construction completion may be deductible under the Income Tax Act. We refer to this idea as pre-construction interest. Interest paid during the under-construction phase may be deducted in five equal installments after the property is finished. Interest paid following construction may also be claimed in the same year. The upper limit of eligibility is still Rs 2 lakh, though.

Illustration: In April 2022, you obtained a home loan for construction and made monthly interest payments of Rs 10,000. After two years, the house's construction was finished in April 2024. Therefore, you can only begin to recover the pre-construction interest of Rs 2.4 lakh (about) that you paid once the development is finished, which should happen in 2024–2025. Section 24(b) allows for a maximum interest deduction of Rs 2 lakh, which includes both pre-construction and current year interest. You can therefore claim a total interest deduction of Rs. 1,68,000 if you pay interest of Rs. 1,20,000 in 2024–2025 (i.e., Rs. 1,20,000 as current year interest and Rs. 48,000 as one-fifth installment of pre-construction interest). Additionally, you can claim an extra Rs 1.5 lakh deduction above the Rs 2 lakh limit under Section 24(b) if your house loan qualifies for one under Section 80EEA.

New Tax Regime’s Impact on Home Loan Benefits

The advantages of home loans under the old tax regime are still available since there are no limitations on deductions; however, under the new regime, these benefits are limited. Let's examine this in more detail.

There is no deduction available under Section 80C for the principal repayment of the home loan, stamp duty, registration fees, or Sections 80EE and 80EEA.
Self-occupied property is not eligible for the deduction under section 24(b) for the payment of the home loan's interest component.
However, rental property is eligible for a deduction under section 24b. Should the net revenue from rental property result in a loss, the loss can be offset against the profit from another home, but it cannot be offset against other sources of income, such as salaries.

Stamp Duty and Registration Charges Deduction under Section 80C

Under Section 80C, in addition to the deduction for principal repayment, stamp duty and registration fees may also be deducted, up to a total of Rs 1.5 lakh.

Deduction for Joint Home Loan

Each loan holder may deduct up to Rs 2 lakh in house loan interest and up to Rs 1.5 lakh in principal repayment under Section 80C from their tax returns if the loan is taken out jointly. They must also be co-owners of the loaned property in order to be eligible for this deduction. Therefore, you can claim a higher tax benefit if you take out a loan jointly with a family member.

Home Loan Tax Benefit: A Summarised Overview

Portion allowed as a Deduction	Section	Maximum Deduction	Conditions
Principal	Section 80C	Rs. 1.5 Lakh	House should not be sold within five years of possession.
Interest incurred during the year	Section 24(b)	Rs. 2 Lakh	This loan can be used to purchase or build a new home, and it must be finished within five years of the end of the fiscal year in which it was obtained. Pre-construction interest deduction permitted with an overall limit of Rs. 2 lakhs. No limit in case of let-out property.
Interest incurred during the year	Section 80EE	Rs. 50,000	Applicable for a loan amount of up to Rs 35 lakh and a property value less than Rs 50 lakh.
Interest incurred during the year	80EEA	Rs. 1.5 Lakh	Applicable for a property with a stamp value less than Rs 45 lakh.
Stamp Duty, Registration Fees etc.	Section 80C	Rs. 1.5 Lakh	Deduction allowed only in the year of payment.

Tax Benefit for Second Home Loan

If you take out a second house loan to purchase another property, you can benefit from the aforementioned tax advantages; but, the total amount of deductions is limited by the aforementioned restrictions. The government has offered further advantages for home property investment in the 2019 Union Budget. In the past, notional rent was computed and taxed as income as only one property could be considered self-occupied and the other was considered to be rented. Even a second property, though, can now be regarded as a self-occupied property.

Loss Under the “House Property” Head

Due to the potential interest deduction under Section 24(b), there is a significant likelihood that you will experience a loss under the category house property if you have not rented out any of your home property. Furthermore, since there is no cap on interest deductions for home loans, you may still lose money on the head house property even if you have rented it out. This is because your interest may surpass your rental income.

The total loss experienced under the "Income from House Property" heading, however, may be deducted from any other source of income in any of the aforementioned situations. However, the maximum amount of losses that can be deducted is at Rs. 2 lakhs. You are unable to deduct losses over Rs. 2 lakhs from your income in the current year, but you are permitted to carry them forward for up to eight years and deduct them from your future home property income.

Conclusion

To sum up, house loan borrowers can take advantage of a number of tax advantages under several sections of the Income Tax Act, including deductions for principal and interest paid, which lower taxable income and offer substantial financial relief. Interest and principal repayment deductions are provided under Sections 24 and 80C, while pre-construction interest, stamp duty, and registration fees are eligible for extra benefits. Additionally, second homebuyers and joint borrowers can maximize their tax savings. By being aware of these housing loan advantages, borrowers can maximize the tax breaks that are available, promoting both their short-term financial stability and long-term real estate objectives.

FAQ

Q1. Who can claim tax deductions on housing loans?

Under Section 24 of the Income Tax Act, those who have taken out a house loan to buy or build a residential property are eligible to deduct the interest paid on the loan from their taxes. Tax deductions for principal repayments can be claimed under Section 80C.

Q2. Can I claim a tax deduction if I construct a house and sell it after a few years?

Tax deduction for the principal repayment is reversed if an owner sells the house within five years of the end of the year in which it is first acquired. There is no comparable mechanism for reversing the interest deduction claimed under Section 24(b); therefore, the interest payment deduction will not be altered.

Q3. Can my spouse claim an income tax deduction if we buy a home jointly?

When your spouse works and earns money from a different source, they are eligible to claim separate deductions on their IT returns.

Q4. Can I claim tax benefits if I purchase an under-construction property with a home loan?

Yes. Deductions are available for loans taken out for newly constructed properties. But after the construction is finished, you have to claim it.

Q5. How much tax will I save if I take out a home loan?

A home loan's tax savings amount depends on several factors, including the loan amount, interest rate, and individual tax slab.

Q6. Are there any tax benefits on a second home loan?

Yes, a second house loan offers tax benefits similar to the first home loan. Notably, there are restrictions on the deductions under Section 80C and Section 24.

Q7. Can I claim both Section 80EE and Section 24?

Yes, as long as you fulfill the requirements, you can claim deductions under both Section 24 and Section 80EE of the Income Tax Act. Interest payments are deductible under Section 24, and first-time homeowners who satisfy certain requirements can further take advantage of additional deductions under Section 80EE.

Q8. How to claim tax benefits on a home loan?

You must provide your employer or the Income Tax Department with your loan statement, proof of interest, and principal payments for a house loan in order to be eligible for tax benefits.

Q9. Is there an interest amount threshold limit that can be claimed as a deduction?

There is no upper limit for a let-out property in this context. However, the highest amount of interest that may be claimed as a deduction is Rs. 2 lakh annually for a self-occupied property.