Maximize Your Savings with Housing Loan Interest Deductions

Housing Loan Interest Deductions

Borrowers repay housing loans through affordable equated monthly instalments or EMIs. Each EMI constitutes a principal component and an interest component. The Income Tax Act, of 1961, provides provisions for claiming home loan tax benefits on both the interest and principal component of the home loan. 

Section 24(b) of the Income Tax Act deals with housing loan interest deductions and Section 80C deals with home loan tax benefits on the principal component of one’s home loan. In this article, we discuss tax benefits on both these components of home finance. 

Section 80C: Home Loan Tax Benefits on the Principal Component of the Home Loan 

Section 80C allows individuals to claim tax benefits on the principal component of their home loan. One can claim tax benefits on both self-occupied and rental properties and the maximum claim that one can make under this section of the Income Tax Act is Rs.1.5 Lakh, irrespective of the number of home loan EMIs one is paying. 

If you have availed of home finance, you can claim home loan tax benefits not just on the payments made towards the repayment of the principal component of one’s home loan but also on the payments made towards covering registration fees and stamp duty charges. 

However, one must keep in mind that one can claim tax benefits under this section only if the house is fully constructed and if the homeowner does not sell the house within 5 years of buying it. 

If a homeowner sells their home within 5 years of buying it, the home loan tax benefits they had claimed get automatically returned and added as income. 

In this case, any claim that the loan borrower has made gets added as income to the year in which the homeowner sold their house and then one has to pay tax on this income. 

Section 24b: Housing Loan Interest Deduction on Interest Component of the Home Loan 

Section 24(b) of the Income Tax Act deals with home loan tax benefits available on the payments made towards the repayment of the interest component of one’s home loan. One can claim benefits up to Rs.2 Lakh under this section of the ITA, irrespective of the number of home loans one has and the number of home loan EMIs one is paying. 

However, this limit applies only to self-occupied properties. If you have rented out a property, there is no upper limit on the maximum home loan tax benefits that you can claim on payments made towards the repayment of the interest component of one’s home loan. 

Further, for under-construction properties, Section 24(b) of the Income Tax Act of 1961, allows one to claim tax benefits on both pre-construction and post-construction interest. One can claim tax benefits on pre-construction interest in five equal instalments spread over 5 years. 

For under-construction properties, one can claim tax benefits on one-fifth of interest paid during the pre-construction period and along with the payments made during the post-construction phase. However, the maximum housing loan interest deduction limit is capped at Rs.2 Lakh under this section of the Income Tax Act. 

Tax Benefits on Joint Home Loans 

If you have availed yourself of home finance along with someone else, know that all parties can claim tax benefits under Section 24b and Section 80C of the Income Tax Act separately. 

The maximum limit under Section 80C is Rs.1.5 Lakh and under Section 24b is Rs.2 Lakh. Please keep in mind that people can claim tax deductions separately under these sections only if they are co-owners and have completed their EMI payments on time. 

Final Words 

In conclusion, home finance comes with a host of tax benefits that can reduce one’s tax liability by a significant margin. 

Over and above the tax benefits mentioned above, first-time homebuyers who have invested in a home through a home loan can also claim tax benefits on home loans under Section 80EE or Section 80EEA, if they are eligible and meet all the qualifying criteria. 

The maximum limit permissible is Rs.50,000 under Section 80EE and Rs.1.5 Lakh under Section 80EEA. These different home loan tax benefits make home loans an ideal way to buy a home and also save money while doing so. 

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