What are the tax benefits on home loan in India?

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Introduction

The Income Tax Act of India offers various provisions for individuals to claim deductions and reduce their taxable income. One of the most substantial deductions that an individual can claim pertains to home loans.

The home loan tax benefit not only encourages homeownership but also provides relief to those burdened with the weight of monthly repayments. These benefits are not limited to just the interest paid on the home loan but extend to various other aspects associated with buying a house.

As homebuyers navigate the complexities of the real estate market, understanding the tax benefits on home loans can offer significant financial relief.

Tax benefits under section 80C

Section 80C of the Income Tax Act is one of the most widely used sections for tax deductions. Among the various deductions it offers, the tax benefit on home loans stands out prominently. Homebuyers can claim a deduction on the principal amount of their home loan under this section.

As of now, the maximum deduction limit under Section 80C is 1.5 lakhs, which includes various investments and expenditures, including the home loan principal repayment. By effectively leveraging this provision, homeowners can significantly reduce their taxable income, thereby ensuring they derive the maximum advantage from their home loan.

Principal repayment

The repayment of a home loan consists of two main components: the principal amount and the interest. The principal repayment, which is the amount paid against the actual loan amount (excluding interest), is eligible for a tax deduction under Section 80C of the Income Tax Act.

This means that homeowners can claim the amount they repay as a deduction from their total income, up to the maximum limit of 1.5 lakhs. However, it’s essential to note that this limit is an aggregate amount, including other investments and expenditures eligible under the same section.

Stamp duty and registration charges

Another significant expense when purchasing a property is the stamp duty and registration charges. The good news for homebuyers is that these charges are also eligible for tax deductions under Section 80C. This deduction can be claimed in the year these expenses are incurred.

By considering these charges as part of the home loan tax benefit, homebuyers can avail of further reductions in their taxable income. This provision ensures that various costs associated with the property purchase offer financial relief in terms of tax benefits, making homeownership a more attractive proposition.

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Tax benefits under section 24

Section 24 of the Income Tax Act introduces another dimension to the realm of home loan tax benefits. While Section 80C primarily focuses on the principal repayment, Section 24 deals with the interest component of the home loan. It allows homeowners to claim tax deductions on the interest amount paid on their house loan.

This provision is especially beneficial as, during the initial years of the loan tenure, the interest component is typically higher than the principal amount. Therefore, homeowners can effectively reduce their taxable income by leveraging the benefits offered under this section.

When combined with the deductions under Section 80C, homeowners can optimize their tax savings, making the home loan a more financially viable commitment.

Interest payment

The interest payment made on a home loan is a significant outflow for most homeowners. Recognizing this, the Income Tax Act provides relief in the form of tax deductions on this interest amount under Section 24. Homeowners can claim tax benefits on home interest payments up to a specified limit.

For self-occupied properties, the limit is set at 2 lakhs. This deduction ensures that while homeowners manage their EMI payments, they can also enjoy substantial tax benefits, effectively reducing the overall cost of the loan.

Additional deduction for first-time home buyers

First-time homebuyers often face financial challenges as they venture into the real estate market. To support and encourage them, the Income Tax Act provides an additional tax benefit under Section 80EE.

Over and above the deductions available under Section 80C and Section 24, first-time homebuyers can claim an extra tax deduction on the interest paid on their home loans. 

This provision can be availed if the value of the property is below a certain threshold and the loan amount does not exceed a specified limit. With this additional deduction, the government aims to promote homeownership among the younger generation and support them in their home-buying journey.

Tax benefits under section 80EE and 80EEA

The Income Tax Act has always aimed to offer multiple avenues for taxpayers to reduce their taxable income. In the realm of home loans, apart from the deductions available under Section 80C and Section 24, Sections 80EE and 80EEA offer additional benefits, specifically tailored for first-time homebuyers.

These sections are designed to provide further relief to new homeowners by allowing them to claim tax deductions on home loan interest payments. The primary intent behind these provisions is to promote homeownership and facilitate the purchase of residential properties, especially among the younger generation.

Addition deduction for interest payment for first-time home buyers

For those stepping into the world of homeownership for the first time, the financial commitments can be daunting.

Recognizing this challenge, the government introduced a deduction under Section 80EE. First-time homebuyers can claim an additional tax deduction on the interest paid on their home loans, over and above the benefits under Section 24. 

This provision specifically caters to those who have taken a home loan for the first time, ensuring they receive added financial support. The combined benefits of Section 24 and Section 80EE significantly reduce the overall cost of the loan for new homeowners.

Tax benefits for affordable housing

With an aim to promote affordable housing in the country, the government introduced Section 80EEA. This provision allows taxpayers to claim tax exemption on home loan interest payments for properties that fall under the affordable housing category.

The deduction is over and above the limit set in Section 24, offering an added incentive for individuals to invest in affordable housing projects. This initiative not only makes homeownership accessible to a broader segment of society but also aligns with the government’s vision of ‘Housing for All.’

By utilizing the tax benefits under Section 80EEA, individuals can make their dream of owning a house property a more affordable reality.

Tax benefits for joint home loan

Owning an affordable house is a dream for many, and to make it more financially feasible, joint home loans have become increasingly popular. When two or more individuals take a home loan together, they not only share the responsibility of loan repayment but also avail tax benefits offered by the Income Tax Act.

Joint home loans offer an intelligent way for co-applicants to maximize their tax savings, thus reducing the effective cost of borrowing. By sharing the burden of the loan, co-applicants can also afford a more significant loan amount, paving the way to invest in a better or more strategic property.

Deduction for each co-owner

One of the primary advantages of a joint home loan is that each co-owner can claim a deduction under various sections, including Section 80EE. If the co-owners are also co-borrowers and are contributing to the EMI payments, they are individually eligible for tax deductions.

The deductions on principal repayments can be claimed under Section 80C, and those on interest payments can be claimed under Sections 24, 80EE, and 80EEA. This means that if there are two co-owners, both can avail of the maximum deduction limit separately, effectively doubling the tax benefits compared to a single borrower.

Tax implications for each co-owner

While the advantages of joint home loans are aplenty, co-owners should be aware of the tax implications. The tax benefits each co-owner can claim are proportional to their share in the loan. For instance, if one co-owner holds a 60% share in the loan and the other 40%, the deductions are split likewise.

It’s essential for co-owners to have a clear agreement about their respective shares to avoid disputes during claim settlements.

Additionally, to avail of the benefits, co-owners must furnish the necessary documentation, including a certificate from the lending institution, specifying the principal and interest amounts paid by each co-borrower during the financial year. 

Proper documentation and understanding of one’s share in the loan ensure that co-owners can make the most of the tax benefits without any hassle.

Tax benefits for second home

In recent years, as people seek diversified investment avenues, the idea of owning a second home has gained traction. While the primary reason might be as an investment or for rental income, the added advantage is the income tax benefit on home loans.

Under the Income Tax Act, specific provisions allow homeowners to avail tax benefits on their second home, just like they would for their primary residence. This has made the idea of owning a second property financially attractive, especially for those who are already servicing a home loan for their primary residence.

Interest payment on second home loan

When you take a loan for your second home, the interest paid on the loan amount is deductible from your taxable income. While the principal repayment on the second home loan can be claimed as a deduction under Section 80C (similar to a joint home loan or first home loan), the rules for interest payment are slightly different.

For a second home, the entire interest paid on the home loan can be claimed as a deduction under Section 24, without any upper cap. This is unlike the first home where the limit is set. However, it’s essential to note that if the second home is vacant or not rented out, it will be deemed as let-out, and the rental value will be determined based on the market rates.

Rental income from second home

Owning a second home often means generating rental income. This rental income is taxable; however, the Income Tax Act provides relief here as well. From the gross rental income, a flat 30% can be deducted towards maintenance and repairs, irrespective of the actual amount spent.

Furthermore, the interest paid on the home loan for the second house can also be deducted from the rental income, thus reducing the tax liability. This, combined with the tax deduction for loan under Section 24 for interest payment, makes owning and maintaining a second home financially viable and an attractive investment proposition for many.

Tax benefits for house loan borrowers

For many, taking a house loan is a significant financial decision, often driven by the dream of owning a home. The Income Tax Act offers relief to home loan borrowers by providing various tax benefits. A home loan borrower can claim deductions on both the principal repayment amount and the interest paid.

Under Section 80C of the Income Tax Act, borrowers can avail a deduction of up to Rs. 1.5 lakh on the principal repayment. Moreover, the interest paid on the home loan can also be claimed as a deduction under different sections, making house loans a tax-efficient borrowing option.

These loan tax benefits under Section 80C and other sections not only reduce the effective cost of borrowing but also encourage individuals to invest in real estate.

Pre-construction interest

The period before the construction of a property is completed is termed as the pre-construction period. Interest paid during this phase doesn’t go unnoticed when it comes to tax benefits.

A borrower can claim this deduction on the pre-construction interest in five equal instalments starting from the year in which the construction is completed or the house is acquired. However, it is essential to note that this claim is clubbed under the overall limit available for home loan interest deduction.

Tax treatment on home loan prepayment

For those who decide to prepay their home loan, there are tax implications to consider. If a borrower repays their loan before the specified tenure, the principal amount repaid qualifies for a deduction under Section 80C of the Income Tax Act, up to the maximum limit of Rs. 1.5 lakh.

However, any prepayment penalty incurred will not be eligible for a tax deduction. On the other hand, the interest payment on the loan, whether prepaid or paid as per the original schedule, remains deductible up to the limits specified under the relevant sections.

Thus, home loan borrowers can plan their prepayments strategically to maximize tax benefits.

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  • Arnav Jalan

    School of Money is an unique self-help platform where you can learn how to earn money and start your own business.You’ll get easy access to necessary insights for personal growth, finance, and leadership development.

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