A housing loan, often referred to as a home loan, serves as a vital instrument for individuals aspiring to own their homes while simultaneously acting as a beneficial financial tool for tax savings. In India, various provisions under the Income Tax Act are designed to offer tax benefits to borrowers, significantly reducing their tax liabilities.
In 2020, the government introduced a major shift in tax structure through the Union Budget, bringing significant changes to how individuals are taxed. This new system lowered tax rates across various income brackets but eliminated many deductions and exemptions previously available. In total, around 70 exemptions were removed under this new regime.
Tax Benefits on Housing Loans in India under the Old Regime:
When you secure a housing loan in India, you become eligible for deductions on two primary components: the principal repayment and the interest paid. The Indian Income Tax Act offers relief on these components, allowing borrowers to reduce their taxable income substantially.
1. Tax Deduction on Interest Paid (Section 24b)
One of the most substantial tax benefits of housing loan is the deduction on interest paid. Under Section 24b of the Income Tax Act, borrowers can claim a deduction of up to ₹2 lakh per year on the interest paid on home loans. This provision applies to loans taken for purchasing or constructing a property, provided the construction or purchase is completed within five years from the end of the financial year in which the loan was sanctioned.
However, if the construction of the property exceeds five years, the deduction limit is lowered to ₹30,000 per year. This deduction is available only for self-occupied properties. For rented properties, there is no upper limit on the deduction, making it an invaluable benefit for those with rental income.
Example:
If you pay ₹2.5 lakh in interest annually on your home loan for a self-occupied property, you can claim a deduction of ₹2 lakh under Section 24b. For a rental property, you can claim the entire ₹2.5 lakh as a deduction.
2. Deduction on Principal Repayment (Section 80C)
The home loan benefit for income tax extends to the principal repayment as well. Under Section 80C, you can claim a deduction of up to ₹1.5 lakh annually on the principal component of your home loan. This deduction is included within the overall ₹1.5 lakh limit available under Section 80C, which also encompasses other eligible investments such as Provident Fund and tax-saving fixed deposits.
To avail of this benefit, the property must not be sold within five years of possession. If sold before this period, previously claimed deductions will be reversed and added back to your taxable income for the year of sale.
3. Additional Deduction Under Section 80EEA
Section 80EEA was introduced to offer an extra home loan for tax exemption for first-time homebuyers. This provision allows borrowers to claim an additional deduction of up to ₹1.5 lakh on the interest paid, over and above the ₹2 lakh deduction available under Section 24b. To qualify, the following conditions must be met:
- The loan must be sanctioned between 1st April 2019 and 31st March 2022
- The stamp duty value of the property should not exceed ₹45 lakh
- The taxpayer should not own any other residential property at the time of loan sanction.
Example:
As a first-time homebuyer paying ₹3.5 lakh in interest, you can claim ₹2 lakh under Section 24b and an additional ₹1.5 lakh under Section 80EEA, totaling ₹3.5 lakh in deductions.
4. Deduction on Stamp Duty and Registration Charges (Section 80C)
In addition to the principal repayment, you can also claim a deduction under Section 80C for stamp duty and registration charges incurred during the property purchase. This deduction falls within the overall limit of ₹1.5 lakh under Section 80C and can be claimed in the same year the expenses are paid.
5. Deduction for Joint Home Loans for Tax Exemption
If you take a joint home loan, each co-borrower can separately claim tax benefits of the housing loan. This means both the principal repayment and interest payment deductions can be claimed individually, provided each co-borrower is also a co-owner of the property. The deductions available remain the same, up to ₹2 lakh for interest under Section 24b and ₹1.5 lakh for principal repayment under Section 80C.
This feature makes joint home loans an effective strategy for maximizing tax savings, particularly for couples or family members purchasing a property together.
Example:
If you and your spouse are co-owners and co-borrowers of a home loan, and the total interest paid in a year is ₹4 lakh, both of you can claim ₹2 lakh each under Section 24b, effectively doubling your tax savings.
6. Deduction Under Section 80EE
Section 80EE provides an additional tax deduction of up to ₹50,000 on interest paid for home loans specifically for first-time homebuyers. This deduction is above the ₹2 lakh available under Section 24b. To qualify, the following conditions apply:
- The loan amount must not exceed ₹35 lakh.
- The value of the property should not exceed ₹50 lakh.
- The loan should have been sanctioned between 1st April 2016 and 31st March 2017.
- The taxpayer should not own any other residential property at the time of loan sanction.
Though this section applies to loans sanctioned in a specific timeframe, it can still be beneficial for taxpayers who availed loans during that period.
7. Tax Benefit on Pre-Construction Interest
If you secure a home loan for constructing a property, you can claim a deduction on the interest paid during the construction period, known as pre-construction interest. This can be claimed in five equal installments starting from the year in which the construction is completed. However, the total deduction is subject to the overall limit of ₹2 lakh under Section 24b.
Example:
If you paid ₹3 lakh in interest during the construction phase, you can claim ₹60,000 (i.e., one-fifth of ₹3 lakh) each year for five years, in addition to the regular interest deduction.
8. Housing Loan for Second Property
For taxpayers owning more than one property, the home loan benefit for income tax extends to second home loans as well. Under the old tax regime, you can consider two properties as self-occupied, and the tax benefit of housing loan on the second home is treated similarly to the first. For rented properties, there is no upper limit on the interest deduction under Section 24b, as the entire interest paid can be claimed as a deduction.
Income Tax Benefits on Home Loans in the New Regime
Under the revised income tax regime, exemptions on interest payments for a self-occupied property are no longer available under Section 24. Additionally, deductions under Section 80C for the principal repayment are not permitted either.
In other words, you cannot claim exemptions for both the principal and interest on a home loan for a self-occupied property under the new system. However, you can still claim exemptions on the interest paid for a home loan on a rental property.
Conclusion:
A housing loan in India offers not just an opportunity to buy a home but also significant tax savings that can reduce the overall borrowing costs. By leveraging the tax benefits of housing loan under various sections of the Income Tax Act, such as Section 24b, Section 80C, and Section 80EEA, homebuyers can effectively lower their taxable income.
Understanding the conditions under which these deductions can be claimed is crucial for maximizing the home loan benefit for income tax purposes. Whether you are a first-time buyer, purchasing a second property, or taking a joint loan, the home loan for tax exemption can lead to substantial financial benefits.
Maintain proper documentation and proof of payment to claim these deductions when filing your tax returns. With strategic planning, a home loan can fulfill your dream of homeownership and become a smart financial tool for managing your taxes efficiently.
