Home Loan Tax Benefits

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At a Glance

We understand that while a home purchase brings you one step closer to achieving your financial goals, it also enables you to save a lot of tax.

The Indian Income Tax Act extends home loan tax benefits on the amount that you repay every month through your EMIs for your first home. EMIs or equated monthly instalments are made up of two components: principal and interest.

The home loan tax benefit provided by the IT Act includes deductions towards both, the repayment of the principal as well as the interest every year.

Home Loan Tax Benefit

Interest Paid on Home Loan – Section 24

Under Section 24 of the Income Tax Act, you can claim a deduction on the interest portion of your EMIs paid through a financial year. The maximum tax benefit you can get in a financial year for a self-occupied home is INR 2 lakh. If you have rented out the property, you can claim the entire interest as a deduction, even if it is more than INR 2 lakh.

Home loan interest paid on property under construction

You cannot claim tax benefits for interest paid on under-construction properties. Once construction is complete, you can claim the interest paid through pre-construction EMI or pre-EMI, in five equal instalments in five financial years starting from the year construction is completed.

Assume you have paid interest of INR 2 lakh as part of pre-EMI till March 31 of the year preceding construction completion. You can claim INR 40,000 per year as tax deductible every year for the next five years.

Let us see how the calculation works:

For example, your construction is completed in the FY 2019-20.

The total interest you have paid till March 31, 2019, is INR 200,000.

You can claim INR 40,000 as a deduction in FY19-20, FY20-21, FY21-22, FY22-23 and FY23-24. The pre-EMI deduction is subsumed under the overall limit of Section 24 and there is no provision to claim more than INR 200,000 per year as an interest deduction.

Another important point to remember is this: If the property construction is not completed within five years of taking the loan, then the total deduction you can claim is capped at INR 30,000 (for all five years).

The five-year deduction calculation starts from the first day of the next financial year immediately after your home loan start date. So if you took a home loan in October 2017, then your five years will begin in the next financial year (on April 1, 2018) and end on March 31, 2023.

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Principal Repayment of Home Loan – Section 80C

In any financial year, you can also avail of a deduction on the principal portion of your home loan EMIs. This deduction is available under Section 80C but limited to a maximum of INR 1.5 lakhs per financial year. To claim this home loan tax benefit, you must not sell the property for five years from the end of the financial year in which you acquired the property. If you sell a property within this time frame, the deduction will be added back to your annual income in the year of the sale.

Other Home Loan Tax Deductions

The stamp duty paid during the purchase of a property and other registration charges are eligible for deductions under Section 80C capped to an overall limit of INR 1.5 lakhs. However, you can claim this home loan tax benefit only in the financial year in which you incurred these expenses. Moreover, if you have already reached the limit of INR 1.5 lakhs under other investments or for a deduction on your home loan's principal repayment, you may not be able to get this home loan tax benefit.

How to Apply

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Frequently Asked Questions

If I have a joint home loan with my spouse, can she or he also avail of the home loan tax benefit?

Yes. In case you have a joint home loan with your spouse, both you and your spouse can claim home loan tax benefits individually, provided that you are co-owners of the property. The deductions are applicable as per the amounts paid by you and your spouse respectively towards the joint home loan repayment.

This includes a maximum of INR 2 lakhs per annum under section 24 of the Income Tax Act for the interest paid on home loans and INR 1.5 lakhs per annum on the home loan's principal repayment under section 80C.

Are there any home loan tax deductions for first time home buyers?

First time home buyers are eligible for the deductions under section 24 and section 80C of the Income Tax Act. Under the former, you can avail a maximum of INR 2 lakh per annum on the interest paid on home loans, while the latter provides deductions of up to INR 1.5 lakh per annum on the principal repayment of the home loan.

Is there a home loan tax benefit on a second home?

If you decide to purchase a second property with another home loan, you can avail deductions up to INR 2 lakh on the entire interest amount paid on both your home loans. In case you rent out the second property, this deduction can be claimed against the rental income as well, in addition to the standard deductions for rental income.

If the second property is not given on rent, then it will be deemed to be self-occupied. Under the income tax laws, you can have two residential houses as self-occupied. If you own and occupy two houses, the deduction against interest payment is restricted to INR 2 lakh per annum for both the houses taken together.

Are housing top-up loans eligible for income tax deductions?

They are but subject to certain conditions. Housing top-up loans can be claimed for tax deductions if they are used for the construction of a residential property or the renovation or repair of such property. You must submit valid bills of expenses. The deductions under these loans are limited to INR 30,000.

However, this will be under the overall deduction of INR 2 lakh provided under section 24. For instance, if you decide to undertake renovations at your home and the housing top-up loan's interest is INR 40,000; you can claim only INR 30,000 as a deduction for the top-up loan. In this scenario, the maximum deduction you will be able to avail of your home loan's interest portion under section 24 is INR 1.7 lakh.

I am already availing of deductions for certain investments under 80C. Will I be eligible for a home loan tax benefit under 80C?

Section 80C of the Income Tax Act provides a slew of investments and schemes through which one can avail tax deductions. However, the section specifies that you can claim a total deduction of INR 1.5 lakh. Hence if you are already claiming deductions on other investments under 80C, then you may not be able to claim the entire INR 1.5 lakh for your home loan.

Disclaimer: The purpose of the page is not to provide advice but to provide information. Sound professional advice should be taken before making any investment decisions. The bank will not be responsible for any tax loss/other loss suffered by a person acting on the above.