By-Jaya Pathak
Owning a home is one of the biggest financial goals for many individuals. But due to high cost of real estate, most people rely on home loans to finance their dream homes. Home loan is a significant financial commitment. It also offers substantial tax benefits which can help you to save some money.
The government of India provides multiple tax benefits on home loan principal repayment and interest payment which can help the taxpayers to reduce their taxable income and ultimately pay less tax. In order to maximize these benefits, it is quite crucial to understand the various sections of Income Tax Act, eligibility criteria and ways to optimize deductions.
In this blog, we will discuss the various tax saving provisions related to home loans.
A complete guide to tax savings when taking a home loan
Understanding tax benefits on home loans
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Tax benefits on principal repayment under section 80C
Under section 80 C, the home buyers can claim deductions on the basis of repayment of principal amount of their home loan. A maximum deduction of around 1.5 Lakh is allowed per financial year. This deduction amount is available only once the construction is completed and the owner has possessed the property. It is to be noted that the property must not be sold within five years of possession, otherwise the deductions claimed under this section will be reversed and added back to the taxable income in the year of sale.
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Tax benefits on interest payment under section 24(b)
The interest payment on a home loan is eligible for a tax deduction under this section. A maximum deduction for a self occupied property is allowed 2 lakhs per year. There is no upper limit for the rented-out properties as the entire interest can be deducted. The interest deduction starts only after the possession of the property.
If the construction will take more than five years then the deduction will be reduced from ₹2,00,000 to 30,000 per year. It also offers pre construction interest. The interest which is to be paid before possession is called pre construction interest. This amount can be claimed in five equal installments starting from the year of possession along with regular interest deductions.
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Additional tax benefits for the first time home buyers
The Government of India offers some additional tax benefits to the first time home buyers under section 80EE and 80EEA. The section 80EE Has the provision for first time home buyers in which an additional deduction of ₹50,000 is offered per year on home loan interest. The loan amount should be 35,00,000 or less and the property value should not exceed ₹50,00,000. It is available only for loans which are sanctioned between financial year 2016-17. Section 80EEA has the provisions for affordable housing buyers.
It provides an additional deduction of 1.5 lakh per year on the interest paid. The property value should not exceed ₹45,00,000. The loan must be sanctioned between April 2019 and 31st March 2022.
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Tax benefits for under construction properties
Under section 80 C, a home buyer can claim a deduction of up to 1.5 lakh per year on the principal repayment on the home loan. This benefit is not available for an under-construction property. The deduction can be claimed once the construction is completed and property is registered in the name of the owner. The tax benefit applies after the completion of construction. If the property is sold within five year possession, deductions will be reversed and added back to the taxable income in the year of sale.
An interest payment on home loan qualifies for tax deduction under section 24(b). For a self occupied property, the maximum deduction is 2,00,000 per year. However, for an under construction property, the deduction works differently. The interest paid during the construction can be claimed in five equal installments, starting from the financial year in which the construction is completed. The preconstruction interest is accumulated which can be claimed in five equal parts starting from the year of possession. Along with this the regular interest paid after possession can also be claimed.
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Tax benefits for joint home loan holders
Under section 80 C, co-borrowers can claim a deduction of up to rupees 1.5 lakh each for the repayment on the principal amount taken for a home loan. The co-borrowers must also be the co-owners of the property. The house which is set as a collateral must not be sold within five years of purchase, otherwise deductions claimed earlier will be reversed. This deduction is applicable only for the loans which have been taken from approved financial institutions. If both the applicants qualify for the deduction on principal repayment, then they can claim a total deduction of ₹3,00,000 on principal repayment, significantly reducing the taxable income.
Under section 24(b) of the Income Tax Act, borrowers can claim a deduction of up to 2,00,000 each on the interest to be paid for a self-occupied home. The home loan must be taken for the purchase or the construction of a house, construction may be completed within five years from the end of the financial year in which the loan was taken, a maximum deduction is available per co-borrower is rupees 2,00,000, provided they contribute to the repayment. For example, if a couple has taken a joint home loan and pays 4,00,000 in interest annually, both can claim ₹2,00,000 each, totalling 4,00,000 deductions under section 24(b).
How can you maximize the benefits of home loan tax?
- You may opt for a joint home loan. It will provide you the benefit to double your tax benefit as both the borrowers can claim deductions separately.
- Ensure that you’re not selling your property before the five years as it can lead to a reversal of section 8C deductions.
- You can use preconstruction interest deduction over five years.
- You can claim additional deductions under various sections if you are eligible for that.
- You can keep a track record of home loan interest certificates from your lender.
Mistakes to avoid
- Many home buyers assume that they can claim tax deductions immediately after taking a loan. However, deductions are applicable only after completion of construction.
- If the construction is delayed beyond five years, then the interest deduction limits dropped to ₹30,000 leading to lower tax savings.
- If you want to claim deductions then you must have proper documentations such as home loan statements, interest certificates and possession proof.
- If the property is sold too early then deductions can be claimed under section 80C which will be reversed to additional tax liability.
Conclusion
Buying a home will provide you some substantial tax saving if you can utilize deductions under various sections. These deductions will reduce the financial burden on the taxpayer. In order to maximize these benefits, a proper tax planning is quite crucial. You can take full advantage of home loan tax benefits in order to make your investment financially rewarding. You can consult a tax advisor for personalized guidance.
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