Home Loan Tax Benefits Under Income Tax Act

Home Loan Tax

Home Loan – a word that we all hear every once in a while. Most people are afraid that taking a loan can bring in more expenses, but they often forget that it can bring in home loan tax benefits. Yes, you’ve got that right. Home loans can bring in tax benefits for you. Yes, taking a home loan can help you save on tax under the Income Tax Act, 1961. 

In this article, we are going to tell you about the tax benefits of home loans. But, before that, let’s take a look at what home loans and tax is. 

A tax is a financial fee or a mandatory charge that the government or an organization takes. In simple words, it is the charges that the government takes from its citizens to pay a salary to the government officials, such as army officers, police officers, and many more. It is also the fees that the government uses to provide essential services that include education and a good healthcare sector. They also use this money to maintain roads, subways, bridges, and sewers.

A home loan is the amount of money that an individual borrows from the bank to buy, construct or maintain their homes and plots. The bank lends this money to the borrower with some interest rate that needs to be paid by the borrower in the form of EMIs every month. And this helps as the home loan customer gets tax benefits under the government policies. 

Home Loan Tax Benefits

In the Union Budget, 2021, on 1st February 2021, the government of India decided against extending the additional tax deductions of Rs. 1.5 Lakhs on the interest rate that is being paid on the home loans on the affordable purchase of homes by one more year. Till March 31’22, Finance Minister Nirmala Sitharaman in the recent budget speech proposed that the deadline should be extended to avail the additional deductions on the payment of interest. 

The home loan repayment consists of two components which are repayment of principal amount and repayment of interest rate amount. The repayment process is of two components, in the same way, the home loan is governed by a different section of the Income Tax Act. These sections are claimed as housing loan interest deduction or tax deduction while filing the Income Tax Returns. The deduction on a home loan is available under Section 80 EEA. This section provides home loan tax benefits of up to Rs. 1.5 lakhs on the interest rate amount that the borrowers need to pay.  

Below mentioned is the home loan tax benefits, a borrower can get which, they can claim as interest on home loan deduction:

Income Tax SectionAllowed DeductionAllowed For
Section 80 EEARs. 1,50,000Repayment on Interest
Section 80 CRs. 1,50,000Repayment on Principal
Section 24Rs. 2,00,000Repayment on Interest

Section 24 of Income Tax Act – Home Loan Interest Tax Benefit (For Construction or Purchase of Real Estate)

Tax benefit on your home loan for payment of the interest amount is allowed as home loan deduction in income tax under section 24 of the Income Tax Act. In accordance with section 24, the income on the home property should be reduced as per the interest amount paid on the loan. This home loan should have been taken for the purpose of either repairing, renewing, constructing, or reconstructing the project.

The maximum amount a borrower can get under this section as a home loan tax exemption is Rs. 2,00,000. The amount has been increased from Rs. 1.5 lakhs to Ra. 2,00,000 lakhs in the year 2014. 

In case, the property for which the home loan has been taken is not self-occupied, there is no maximum limit prescribed for this case and the taxpayer is liable to take the housing loan tax deduction on the whole interest amount of the home loan under Section 24 of Income Tax Act.

The quantum of home loan tax deduction has been summarized in the table below:

Property TypeSelf Occupied PropertyNot Self-Occupied Property
Status Of Completion and Allowed Deductiona. Completion of property within 5 years – Rs. 2,00,000.

b.  Property construction not completed in 5 years – Rs. 30,000. 

a. Completion of property within 5 years – Nothing (Zero limit).

b. Completion of the property after 5 years – Nothing (No limit).

Section 80 C of Income Tax Act – Principal Amount Home Loan Tax Benefits

The amount that an individual/HUF needs to pay as a repayment of the principal amount is liable for home loan tax exemption under the Income Tax Act, Section 80 C. An amount of Rs. 1,50,000 (maximum amount) is allowed for tax deduction under section 80 C. 

This amount is the total home loan tax exemption under section 80 C, which includes the amount you invested in PPF Account, Equity Oriented Mutual Funds, Senior Citizen Saving Scheme, National Savings Certificate, Tax Saving Fixed Deposits, etc. 

This tax rebate on home loan tax is under section 80 C on a regular payment basis. This deduction is irrespective of the year for which you have made the payment. The amount a borrower pays for stamp duty and fees for registration can also be counted under the tax rebate on the home loan. This is possible under section 80 C even if the Assess has not taken any loan for this. 

However, this home loan tax deduction is only possible on the principal amount when the construction of the property is completed. Also, the completion certificate should be awarded after the completion to get the home loan tax benefits. There is no tax exemption for the years in which the property was under construction on the principal amount. 

Many people buy an under-construction property as it is at a lower price than a fully constructed property. In case you plan on buying an under-construction property to get the home loan tax benefits, you should know that GST is also imposed on the under-construction property. And there is no service tax imposed on the fully constructed properties. 

Under Section 80 C (5), it is stated that if the assess transfers the property (on which he claimed the home loan tax deduction) without completing the 5 years from the end of the financial year in which they obtained the possession of the property, then there will be no deduction or benefits by the Income Tax Act on the home loan under section 80 C.

Here are few points that you can take for a tax deduction on the principal amount under Section 80 C: 

  • Claiming tax deductions on stamp duty and registration fees can be done only once.
  • For both self-occupied as well as let-out properties, a tax deduction claim of Rs. 1.5 lakhs can be claimed every year on the principal amount from the taxable income. 
  • To claim the home loan tax benefits, you need to complete the construction within five years from the date you received your home loan amount.
  • Do not sell the house for 5 years from the time of possession to claim the benefits of tax exemption. 
  • If in case, you sell your home without completing 5 years then the claimed deduction will eventually reverse in the year you sell your home. This claimed amount will also be added to the income of the year you sell your property.

Section 80 EEA – Home Loan Tax Benefits On Interest

You can claim interest deduction under section 80 EEA of the Income Tax Act as well. Section 80 EEA deduction is allowed only under the mentioned circumstances:

  • It is applicable only when the amount of stamp duty for the property is below Rs. 45 Lakhs.
  • The sanction of the loan should be done between 1st April’19 to 31st March’21.

Under the Section 80 EEA, you can claim a home loan tax deduction of up to Rs. 3.5 lakhs. Also, the benefit of this section can be claimed over as well as above the exemption under Section 24 of the Income Tax Act. But at the same time make sure that the value of the property is less than Rs. 45 Lakhs. 

Comparison Of Home Loan Tax Benefits under Section 24 and Section 80 C

ParticularsUnder Section 24Under Section 80 C
Allowed home loan tax deduction forInterest AmountPrincipal Amount
Property TypeAny of the real estate propertyResidential home properties only
Tax Deduction BasicBased on accrualBased on the paid amount
Quantum of Home Loan Tax Deduction allowed
  • If it is a self-occupied property then an amount of Rs. 2,00,000.
  • If it is not a self-occupied property then there is no limit. 
Rs. 1.5 Lakhs
Loan’s PurposeFor construction, reconstruction, purchasing, repairing, or renewing the property.Construction or purchasing a new residential property. 
Tax Deduction Eligibility For ClaimingThe construction or purchase should be done within the 5 years span. None
Sale of Property RestrictionNoneThe tax deduction can get reversed if it is sold within the 5 years span. 

Home Loan Tax Benefits Under The Three Sections

ParticularsQuantum Of Amount Deduction
Under Section 24a. For self-occupied property – Rs. 2,00,000

b. For non-self occupied property – No set limit

Under Section 80 Ca. For self-occupied property – Rs. 1.5 Lakhs

b. For non-self-occupied property – Rs. 1.5 Lakhs

Under Section 80 EEAa. For self-occupied property – Rs. 1.5 Lakhs

b. For non-self-occupied property – Rs. 1.5 Lakhs 

Joint Home Loan Tax Deduction

If you and your spouse or two or more people have taken the home loan jointly, then both of them are eligible for home loan tax exemption. It is applicable for the interest paid up to Rs. 2 lakhs. The tax deduction is applicable on the principal amount paid along with Rs. 1.5 lakhs for each. But if someone wants to claim this tax deduction, all the borrowers should be the co-owners of the property. Hereafter, getting a joint loan is more beneficial and can give you better and greater tax benefits.

Owning a Second Party Home Loan Tax Benefits

In accordance with the current provisions, payable interests are also liable for tax benefits. You can claim the whole amount of interest that you paid. 

And the second party homes are also treated as self-occupied homes, and one can claim for tax benefits. This is to help the borrowers save more taxes.

How Can You Claim Home Loan Tax Benefits

Step 1: Calculate the tax deduction that you can claim.

Step 2: You should either be the owner or the co-owner of the property in order to claim tax benefits. 

Step 3: Next step is to submit your Certificate of Home Loan Interest to your employer so that the adjustment in tax can be done at the source.

Step 4: In case you do not wish to perform the above step, you can file the Income Tax Returns by yourself. 

Step 5: And if you are self-employed, you do not need to submit these documents anywhere. But keep it handy if the Income Tax department raises any questions or queries in the future.

Tax Benefits Calculation On Home Loan

The easiest way you can calculate your tax benefits on a home loan is by using an online calculator. You just need to fill in the details of your home loan and click on calculate. Then, a detailed calculation will appear on the screen. The home loan details that you will need are as follow: 

  • Amount of Loan
  • Loan Tenure
  • Rate of Interest
  • Start Date of the Loan
  • Your Gross Annual Income
  • The existing deduction (if any) under Section 80 C/D of the Income Tax Act.

Home Loan Tax Benefits On Second Home

If you plan on buying a second home with a loan, then you are liable to get the tax benefits according to the payable interest. On buying the second home on loan, you can claim the entire rate of interest amount paid as there will be no cap applied on this loan.

Based on the notional rent, individuals can make tax payments on the second home while claiming the one property as self-occupied. According to the present-day Indian Union Budget, a proposal was set out that the individual can claim their second home as a self-occupied home.  This will help the borrowers to save more on the taxes.

FAQs

What are the tax benefits for Home Loan?

A home loan borrower can claim a tax deduction on both the principal amount and the interest amount. A home loan can help individuals save up on the tax that they need to pay in the financial year.

Is it worth taking a home loan for tax benefits?

As you get tax exemption and deduction benefits on the home loan of up to Rs. 2 lakhs under Section 24 and Rs. 1.5 lakhs under both Section 80 C and 80 EEA.

How much tax can be saved on a home loan?

Claiming tax benefits under section 24 of the Income Tax Act, you can get a deduction of Rs. 2 lakhs after completing the construction of your home within 5 years.

How do I claim tax benefits on a home loan?

You should either be the owner or co-owner of the property in order to claim home loan tax benefits. You can either claim the benefits through your employer or can claim it by filing ITR yourself.

Is home loan interest part of 80C?

Yes, a home loan is a part of Section 80 C and the property owner can claim it and get up to Rs. 1.5 lakhs deduction under this section.

Can we show 2 home loan benefits in taxes?

Yes, you can show two home loan tax benefits. There is no restriction on the number of home loans that an individual can claim.

What are the existing income tax benefits on home loans?

Even when a home loan is taken on a joint basis, both of the borrowers can claim for tax exemption. But to claim this deduction, they should be the co-owners of the property. Also, under the Income Tax Act, 1961, the borrowers can get a tax deduction.

How can a home loan save your income tax?

You can save on income tax by claiming a tax deduction on your home loan. This will help you to save up to Rs. 2 lakhs on income tax.

How do I claim a tax rebate on a home loan?

Home loan borrowers can claim tax deductions under the Income Tax Act, 1961. But to claim it, make sure that the property is in your name.

What are the tax benefits on home loans in India?

Under the Income Tax Act, home loan borrowers are liable for tax exemption.