Home Loan Tax Benefits - How to Save Tax on Home Loan?

Home Loan Tax Benefits F.Y 2023-24 – A Snapshot

In India, owning a house can be said to be a landmark event that is most often aided by a home loan. Home loans are instruments that allow the borrower to acquire the funds from a bank or any NBFC for purchasing or constructing a house. These loans entail many options in the form of repayment options, interest rates, and tenure choices, thus making them pretty accessible.

Knowing the tax benefits that are associated with a home loan is essential for maximizing savings. The Indian government has several tax rebates & deductions to encourage people towards home ownership, thereby reducing the financial burden on taxpayers. You can lower your taxable income by a large sum and save hundreds of thousands every year by availing these benefits.

Understanding Home Loan Tax Benefits

Section 80C: Repayment of Principal

• Home loan borrowers can avail up to ₹1.5 lakh deductions per financial year, on the repayment of principal on your home loan. This helps you make some significant savings on your taxable income.
• The said house property should not be sold within five years from the date of possession. If sold within the five-year period, all deductions claimed earlier would be withdrawn.
• Do remember that, if the property is sold within five years of taking possession, the previously claimed deduction will be reversed and added to your income for the year of sale, thus increasing your tax liability.

Section 80C – Deductions on Stamp Duty and Registration Charges

• Deduction Amount: You can, along with the principal repayment, also claim deductions for stamp duty and registration charges under Section 80C within the overall limit of ₹1.5 lakh. It further brings down your taxable income.
• Condition: This deduction can be claimed only in the year these expenses are incurred. So, ensure that you have all necessary documentation to support your claim.

Section 24(b): Interest paid on Home Loan

• Objective: In order to claim a tax deduction, the loan has to be borrowed for the purchase or construction of a house property. This particular section addresses only the interest portion in your home loan EMI.
• For loans taken for construction purposes, the construction must be completed within five years from the end of the financial year in which the loan was taken. If the construction is delayed beyond this period, the eligibility to claim deductions will be reduced.

• Self-Occupied Property
• Deduction Amount: By Section 24(b), you're allowed to claim a deduction to the extent of ₹2 lakhs per annum on the interest outgo (which includes EMI) on loans for a self-occupied house property. This provides a great tax relief to you.
• Condition: This maximum deduction for interest on self-occupied house property is applicable since the assessment year 2018-19.

• Let-Out Property:
• Deduction Amount: There is no ceiling on the interest deduction for let-out properties. You can claim a deduction on the entire interest paid. This can often result in very high tax savings.
• Condition: All the interest paid on home loans for let-out properties is permissible for deduction. This makes it very lucrative for investors in property.

• If the time taken for construction exceeds five years, then the deductions in respect of the interest are limited to Rs. 30,000 per the financial year, which significantly reduces the tax benefit that may be availed.

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Deduction of Interest Paid During the Pre-Construction Period

• Eligibility: You can avail of these benefits once the construction work is finished, or right after, subject to the condition that you should be in possession. This is for both self-occupied property and let-out property.
• Deduction: The Income Tax Act permits a deduction for pre-construction interest in five equal installments, starting from the year in which the property is acquired or the construction is completed.
• Ceiling: The maximum entitlement for pre-construction interest, combined with the current year's interest deduction under Section 24(b) of the Income Tax Act, remains capped at ₹2 lakhs.

• For example, if you took a home loan in July 2021 for construction and paid interest of ₹12,000 a month, and if the house construction got over in October 2023, then you start claiming the pre-construction interest of ₹3.12 lakh (₹12,000 x 26 months) paid by you over five years starting from 2023-24.
• In no case shall the interest under this section be deductible beyond ₹2 lakhs for current year's and pre-construction interest. So, in case during 2023-24, you have actually paid ₹1,44,000 as interest, you can claim a total interest deduction of ₹2,07,200, that is, ₹1,44,000 as current interest and ₹63,200 as 1/5th instalment of pre-construction interest.
• Additional Deduction: If your home loan falls under the eligibility of deductions via Section 80EEA, you can get an additional deduction of up to ₹1.5 lakh above the limit of ₹2 lakh declared under Section 24(b). This makes further tax concession accessible for homebuyers in affordable housing.

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Additional Deduction under Section 80EE

• Deduction Amount: Homebuyers can claim an extra deduction of ₹50,000 under Section 80EE, in addition to the deductions permitted under Section 24(b).
• Conditions:
• Available for loans amounts of ₹35 lakh or less.
• The value of the property must also not be more than ₹50 lakhs.
• The loan was sanctioned during the period from 1st April 2016 to 31st March 2017.

• On the date of sanction of loan, they should not own any other house; it means that he is a first-time house owner.

Additional Deduction under Section 80EEA

In its move to boost the realty segment, Budget 2019 granted additional deduction under Section 80EEA for first time homebuyers, which enabled them to claim deductions up to ₹1.5 lakh.

• Deduction Amount: Under Section 80EEA, you are allowed additional deductions up to ₹1.5 lakh. This deduction comes on top of the ₹2 lakh limit under Section 24(b) and, hence, offers huge additional tax savings.
• Conditions to Claim Deduction:
  • The property registration value should not exceed ₹45 lakhs.
  • The deduction can be availed for loans sanctioned between 1 April 2019 and 31 March 2022.
  • The borrower, as of the date of sanction of loan, does not own any other house, thus making him or her a first-time homebuyer.

Deduction for Joint Home Loan

• Joint home loan borrowers can each claim a deduction of up to ₹2 lakhs on home loan interest and up to ₹1.5 lakh on principal repayment under Section 80C in their tax returns.
• Eligibility: To claim these deductions, both spouses must be co-owners of the property.
• Benefit: By taking a joint loan, both co-borrowers can independently claim these deductions, significantly boosting the household's overall tax savings.

Practical Tips to Maximize Home Loan Tax Benefits

Choosing the Right Home Loan

• Comparing Interest Rates:
Before selecting a home loan, it is crucial to compare interest rates offered by various banks and financial institutions. Since home loans are huge amounts, any saving you can do with interest rates can result in significant savings. Use online comparison tools to find the best rates and consider opting for a fixed or floating rate based on your financial stability and market predictions.
• Considering Loan Tenure:
The repayment tenure of your home loan affects both your monthly EMI and total interest paid. A longer tenure lowers the EMI but increases total interest, while a shorter tenure raises the EMI but decreases total interest. Choose a tenure that balances affordability and interest savings.

Documenting and Claiming Deductions -

• Importance of Maintaining Records:
Proper documentation is essential for claiming home loan tax benefits. Maintain records of your loan agreement, repayment schedule, interest certificates from the lender, and receipts for stamp duty and registration charges. These documents are necessary for verifying your claims and ensuring that you receive the full tax benefits available.
• Common Mistakes to Avoid:
Ensure that you do not miss out on claiming deductions due to incomplete or incorrect documentation. Avoid common mistakes such as not claiming pre-construction interest, failing to include co-borrowers in tax returns if you have a joint loan, and not retaining proof of all payments made. Double-check your tax filings to ensure all eligible deductions are claimed accurately.

Using Home Loan Benefits for Financial Planning

• Integrating Home Loan Benefits in Overall Tax Planning:
Home loan tax benefits can be a crucial part of your overall tax planning strategy. By effectively utilizing deductions under Sections 80C, 24(b), and 80EE/80EEA, you can reduce your taxable income significantly. Combine these benefits with other tax-saving investments to optimize your tax liability.
• Long-Term Financial Implications:
Home loans go for an extended period of time and it's important to figure out their long term implications. Factor in the potential for interest rate changes, prepayment charges, and the impact of additional deductions on your overall financial health.

FAQs on Home Loan Tax Benefits