Home Loan Tax Benefits Explained: Save Substantial Income Tax on Your Home Loan

Home loan tax benefits

BASIC TEAM

6 mins reading

Last updated on 5th January 2024

Getting a home loan in India is quite simple but it can be an expensive affair. However, there is a silver lining to it, and that is the various tax benefits one can get every year on it, as per the provisions of the Income Tax Act, of 1961. This Act contains various sections under which different home loan tax benefits are provisioned for home loan borrowers to avail.

Table of Contents

A house loan has two aspects: repayment of the principal sum and the interest payments. Luckily, both of these qualify for tax deductions. While principal repayment is deductible under Section 80C, deduction on the interest payment is allowed under Section 24(b) of the Income Tax Act, 1961. Read on to know how to avail of the interest on housing loan deduction for ay 2023-24.

Income Tax Benefits on Home Loans

The following table shows the annual tax benefits under the different sections of the Income Tax Act, of 1961, highlighting the home loan interest tax deduction and housing loan interest exemption.

Section of the Income Tax Act Nature of Tax Deduction Maximum Deduction
Section 80C Under Section 80C, the tax deduction is available on the principal amount repayment Up to ₹1,50,000
Section 80C Deduction on registration charges and stamp duty Up to ₹1,50,000
Section 24(b) Under Section 24(b), the tax deduction is available on the payment of interest on the house loan, given that the acquisition or construction of the house is completed within 5 years.  Up to ₹2,00,000
Section 80EE

 

Under Section 80EE, additional deductions can be availed in case a home loan is for the first residential house.

This loan must be sanctioned (beginning 01.4.2016 and ending 31.3.2017). The loan amount is less than or equal to ₹35 lakh and the value of property does not exceed Rs. ₹50 lakh.

 

Up to ₹50,000
Section 80EEA

Under Section 80EEA, tax deductions can be availed on interest payments up to a limit of ₹1,50,000. This additional benefit is over the allowed deduction of ₹2 lacs under Section 24(b).
Hence, taxpayers who fulfill the criteria of Section 80EEA can claim a deduction of up to ₹3.5 lacs for interest paid on their home loan.

Up to ₹1,50,000
Joint Home Loan If a house loan is taken jointly, both taxpayers can avail deduction on the interest paid on the home loan up to ₹2 lacs under Section 24(b) and a tax deduction on the repayment of principal amount up to ₹1.5 lacs under Section 80C.

Up to ₹2,00,000 u/s 24b

Up to ₹1,50,000 u/s 80c

Now, let’s understand each of the above sections in detail:

Section 80C: Tax Benefits on Repayment of the Home Loan Principal Amount

A home loan borrower is allowed to claim tax benefits up to ₹1,50,000 on the principal payment from his/her taxable income, each year. This benefit can be claimed for both rental and self-occupied properties.

  • To claim benefit under this section, the property for which the loan has been borrowed should be fully built.
  • Additional tax benefit of ₹1,50,000 can also be claimed under this section for stamp duty and registration fees; however, it can be claimed only once, i.e., at the time of these expenses incurred.
  • A deduction claim cannot be made if the same property is sold within 5 years of possession.
  • In such a case, any claimed deduction shall be reversed in the year of sale. In addition, this sum will be included in the person’s income for the year, in which the property is sold.

Suggested read: Home Renovation Loan Tax Benefits

Section 24(b): Home Loan Tax Benefit on Payment of Interest

Under Section 24(b), a taxpayer can claim a deduction on the interest paid on the house loan. In this case,

  • One can claim a deduction on the interest paid on the house loan for a self-occupied house. The maximum tax deduction allowed is up to up to ₹2,00,000 from the gross annual income.
  • In case a person owns two homes, then in that case, the combined tax claim deduction for home loans cannot exceed ₹2,00,000 in a financial year.
  • In case the home has been rented out, then there is no restriction on how much one can claim on the interest paid. This can include the complete amount of interest paid on the house loan for the purchase, construction/reconstruction, and renewal or repair.
  • In case of loss, one can claim a deduction of only ₹2,00,000 in a financial year, while the rest of the claim can be carried forward for a tenure of eight years.

Under Section 24(b), a person can also claim a deduction on the interest rate in case the property purchased is under construction, once the construction is completed. This section of the Act allows claims on both pre-construction and post-construction period interest.

Section 80EE: Additional Deductions on Interest

Under Section 80EE, there is the provision of tax benefits on income tax for first-time home buyers.

  • This deduction can be claimed only if the cost of the house acquired does not exceed ₹50 lakh and the loan amount is up to ₹35 lacs.
  • This loan should have been sanctioned between 1st April 2016 and 31st March 2017.
  • The claim under 80EE deduction, in this case, would be accessible from 2016-17 onwards.
  • The benefit of this deduction is that it can be claimed continually till the time the payment is completely repaid.

Suggested read: Claim Tax Benefits on Second Home Loan

Section 80EEA: Interest on Home Loan for First-Time Buyers

Under Section 80EEA, a house loan borrower is eligible to get an additional deduction of up to ₹1.5 lakh. However, to claim this deduction, the following parameters are to be fulfilled:

  • The person should be a first-time property buyer, and at the time of the sanction of the loan, he or she should not own any residence.
  • The house loan should be availed from a housing finance company or a financial institution.
  • The loan must be sanctioned in the duration, beginning 1st April 2019 and ending 31st March 2022.
  • The value of stamp duty of the property should not be more than ₹45 lakh.
  • In case, the property is jointly owned by the person and his/her spouse and both make loan payments, then a claim deduction is allowed to both.
  • The person claiming deduction under this section can either be a resident or non-resident of the property.

Joint Home Loan: Dual Benefit

Under this provision, if a property loan is availed jointly, each borrower is allowed to claim a deduction on the home loan interest up to ₹2 lakh under Section 24(b). Additionally, they are eligible for a deduction on the principal repayment amount of up to ₹ 1.5 lakh.

  • This is beneficial as both get deductions compared to one individual getting a deduction.
  • However, in this case, both joint owners must complete their EMI payments on time.

These are the provisions the government is giving to home buyers encouraging them to opt for home loans and get benefits on their income tax. 

How to Claim Tax Benefits on Home Loans?

Claiming home loan tax benefits in India is a structured process. Here's a more detailed explanation of each step:
 
1. Collect Necessary Documents: The most crucial step is gathering all the relevant documents. The loan statement, which you can obtain from your bank or financial institution, is key. This statement should break down the amounts repaid towards principal and interest over the financial year, essential for claiming a housing loan interest deduction. It's essential as these two components are claimed under different sections of the Income Tax Act.
 
2. Property Ownership Proof: You need to establish that you are the owner or co-owner of the property for which the home loan was taken. This is crucial because home loan exemption on tax benefits cannot be claimed if you are not listed as an owner. Documents that can serve as proof include the property registration document or the sale deed.
 
3. Construction or Purchase Agreements: These documents are necessary to establish the timeline of the property's purchase or construction. The date of purchase is important for claims under certain sections, such as Section 80EE, which is specific to first-time homeowners. The completion date of construction is also crucial, especially for claiming pre-construction interest.
 
4. Completion Certificate: For newly constructed properties, a completion certificate issued by a competent authority (like the municipal corporation) is necessary. This certificate is required to claim tax deductions and is a testament that the construction complies with the relevant regulations and standards.
 
5. Submit to Employer: If you are a salaried individual, you can facilitate the adjustment of your Tax Deducted at Source (TDS) by submitting these documents to your employer. This proactive step can adjust your taxable income and TDS throughout the financial year, offering the benefit of reduced tax liability every month instead of a lump sum refund after filing returns.
 
6. File Income Tax Returns: While filing your annual income tax returns, you need to declare the principal and interest amounts under the relevant sections. Section 80C allows deductions on principal repayments, while Section 24(b) pertains to interest payments. Additional sections like 80EE and 80EEA offer further deductions under specific conditions. Ensure you fill in these details accurately in your ITR forms.
 
7. Keep Records: Finally, maintaining a file of all these documents is crucial. In case of any scrutiny or queries from the Income Tax Department, these documents will serve as your proof of the claims made. It is advisable to keep these records for at least six years, which is typically the period of limitation for income tax assessments.
 
By following these steps methodically, you can effectively claim and maximize the tax benefits available on your home loan, thereby reducing your overall tax liability.

Suggested read: Pre-EMI Tax Benefits on Housing Loans

How to Calculate Tax Benefits on Home Loan?

Calculating tax benefits on a home loan involves considering both the principal and the interest components:

1. Principal Repayment: Under Section 80C, the repayment of the principal amounts up to ₹1,50,000 per annum can be claimed as a deduction. For example, if your annual income is Rs. 12 lakhs, you could end up paying income tax on only Rs 10.5 lakh. However, this is on the condition that the house is not sold before five years of purchase. If it is sold before that period, any deductions claimed in previous years will be disallowed.

2. Interest Payment: Under Section 24(b), interest payment up to ₹2,00,000 can be claimed for a self-occupied property. For let-out property, there is no upper limit, but loss claimed under the head “Income from house property” cannot be more than ₹2,00,000.

3. Additional Deductions: Sections 80EE and 80EEA provide additional benefits under specific conditions.

FAQs About Home Loan Tax Benefits

Interest paid on a home loan before possession can be claimed in five equal installments starting from the year in which the property is acquired or constructed.

Home loan borrowers who are also the owners or co-owners of the property can claim tax deductions.

Yes, home loan interest is tax-deductible under Section 24(b) and other relevant sections like 80EE and 80EEA for the financial year 2023-24.

Claim exemption on home loan interest by declaring it in your income tax return under the appropriate sections.

No, to avail of the tax benefits of a home loan, you must be an owner or co-owner of the property.

Agricultural land in rural areas is generally exempted from income tax in India. However, for specific queries regarding property tax exemptions, it's best to consult a tax professional.

Published on 30th June 2023