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Home Loan Tax Benefit – Know your Income tax benefits of owning a house

  • Akshatha Sajumon
  • 06 Sep
  • 8 minutes

Owning a house is one of the biggest dreams and missions of the majority of people. It gives a much-needed sense of belonging and a safe haven for every person in their times of happiness and otherwise. Real estate is expected to grow exponentially in India and is the second-largest employment generator in the country. However, buying a house in today’s market is not easy. 

Although it is the vision of the Prime Minister to provide affordable housing for everyone, it is a distant dream. The reality is that the majority of people in India have to apply for a home loan to purchase a house. It is a huge cost as well as a long-term cost. In order to provide relief from these high costs, the Income Tax Act, 1961 provides many benefits on home loan payments in the form of deductions or exemptions from the gross total income of a taxpayer.

Below are a few details of the tax benefits on home loans.

What are the tax benefits of a home loan?

The Income Tax Act. 1961 provides multiple benefits to the taxpayers to reduce their burden of tax liability. These tax benefits are available to individual taxpayers having a home loan for purchase or construction of a house property upon filing their tax returns. The highlights of such tax benefits on home loans are tabled below.

Section Description Maximum Amount of deduction or exemption
Section 24(b) Deduction for the interest portion of the EMI paid Rs. 2,00,000 in case of self-occupied property.No upper limit in case of let-out property 
Section 80C Deduction of the principal paid  Rs. 1,50,000
Section 80EE Additional deduction for first-time buyers Rs. 50,000
Section 80EEA Additional deduction for buyers not eligible for benefit under section 80EE Rs. 1,50,000

What is the deduction under Section 80C for a home loan?

Section 80C is the most favoured section for deduction to the taxpayers. This section provides a blanket deduction for various expenses. One of the many eligible expenses for deduction under section 80C is the principal portion of the home loan EMIs paid by the taxpayer. The maximum deduction under this section is Rs 1,50,000. 

The underlying condition for deduction under this section is to hold the house property for a minimum period of 5 years. If the property is sold prior to the completion of 5 years, the amount of deduction that is claimed earlier will be reversed in the year of sale.  

Section 80C also provides for deduction of stamp duty and registration charges provided they are up to the maximum limit of section 80C i.e., Rs. 1,50,000.

What is the deduction under Section 24 for a home loan?

The home loan is a long term loan with the interest portion being a huge component of the loan amount to be repaid. While section 80C provides for deduction of the principal amount, it may always be quite beneficial as there are other deductions eligible under this section. Section 24 provides a deduction for the interest component of the home loan EMI. Deduction under this section is provided based on the type of property. The details of deduction under this section are tabled below.

Nature of property Amount of deduction under section 24(b)
Self-occupied property Maximum deduction Rs. 2,00,000
Let out property No upper limit 

There is no restriction on the sale of property for availing deduction under this section. Although there is no limit of deduction under this section for a let our property, the total loss that can be adjusted against the income from other heads is restricted to Rs. 2,00,000 in any financial year. The balance loss if any is allowed to be carried forward for a period of 8 consecutive years under the head “Income from House Property’. 

What is Section 80EE (Deduction for first time home buyers)?

Section 80EE is a recently introduced section for the benefit of first time home buyers. These buyers are allowed an additional deduction of Rs. 50,000 on the interest paid towards the home loan. The deduction under this section is subject to certain conditions. These conditions are mentioned below.

  1. The deduction is eligible for first time home buyers. I.e., home-buyers who do not own any other property prior to the one for which the loan taken is eligible to provide a deduction under section 80EE.
  2. The loan should be sanctioned between 1st April 2016 and 31st March 2017.
  3. The loan amount cannot exceed Rs. 35,00,000 and the value of the property should be less than Rs. 50,00,000.

What is the additional deduction under section 80EEA?

Section 80EEA is another newly introduced section for the benefit of first-time buyers. Additional deduction of Rs. 1,50,000 is provided under this section towards the interest paid on the home loan subject to certain conditions. This section was introduced in the budget of 2019 and is available to first-time homeowners. Given below are the details of the conditions under this section.

  1. The assessee should not be eligible for additional deduction under section 80EE.
  2. The maximum stamp value of the property should not be more than Rs. 45,00,000.
  3. The loan for the new home must be sanctioned between 1st April 2019 to 31st March 2020. The benefit under this section was extended till the end of March 2022 under the budget of February 2021. 

What are the tax benefits on a home loan of under-construction property?

In many cases, homeowners buy a house that is an under-construction property that may be handed to the owner after a couple of years. During this time, the assessee is liable to pay the EMIs on the home loans. Moreover, if the assessee is staying at a rental place during such time, they are faced with the dual burden of rent as well as EMIs. To ease this burden, tax benefits on home loans are available on under construction properties too. Some points related to this deduction are,

  1. Assessee can claim a deduction of the interest portion paid during the construction period. 
  2. Such deduction is available after the completion of the construction of the house property or immediately if the buyer has bought a fully constructed property.
  3. Assessee can claim a deduction for the interest paid in the pre-construction period for a period of 5 years in equal installments. 
  4. The period of deduction will start after receiving the completion certificate of the property. 
  5. The maximum deduction available under this section is Rs. 2,00,000. 
  6. In case the property is not constructed within 5 years, the deduction available tinder this section is Rs. 30,000 

Apart from the deductions mentioned above, there are other provisions related to a home loan that need to be considered. The details of such provisions are mentioned below.

Joint home loan

Most homebuyers opt for a joint home loan to buy a new property. This gives them the benefit of additional deduction as well as lower rate of interest if one of the borrowers is a woman (most lenders provide a concessional interest rate for women borrowers).

In the case of a joint home loan, both the borrowers are eligible for deductions under the above sections for payment of principal or interest component of the home loan, provided they meet all the eligibility parameters set as per the provisions of these sections. 

Second home loan

The provisions of the Income Tax Act also provide a deduction on a home loan taken for the purchase of a second property. A deduction is available for the interest portion on such loans without any maximum capped amount. 

As per the current provisions, homeowners can claim only one property as self-occupied and have to pay on the second property based on notional rent. The recent budget has proposed to allow the assessee to claim the second property as self-occupied. This will eventually help them in claiming the additional deductions and thereby saving more taxes.

Current home loan rates of top lenders

Home loans are available from banks as well as many NBFCs. Interest rates depend on many factors like the loan amount, borrower’s profile, credit score of the borrower, etc. The top lenders in this category are mentioned below. 

Lender Home loan interest rate
Kotak Mahindra Bank  Starting from 6.60% 
SBI Starting from 6.80% 
HDFC Bank Starting from 6.75% 
LIC Housing Finance Starting from 6.66% 
ICICI Bank Starting from 6.75% 

Conclusion

A home loan is a major expense for an individual taxpayer. Most taxpayers spend half their life repaying the home loan. Tax deductions offered under the IT Act provides crucial relief to such taxpayers and helps them plan their expenses in a better manner.

FAQs

1. What are the pre-requisites to claim a deduction for home loan repayment?
A. The pre-requisites to claim a deduction for home loan repayment are 

  • The borrower should be the owner of the property 
  • They should make payment for the EMIs.
  • File the necessary ITR on time

2. Is the borrower allowed to make a prepayment of the home loan?
A. Yes. Most lenders allow for the prepayment of the home loan. The amount of prepayment will differ for each lender based on their specific guidelines.

3. What is the moratorium period in a home loan?
A. The moratorium period is when the borrower is provided relief from the payment of home loan EMIs subject to fulfilling certain conditions specified by the lender in this regard.

4. What is the maximum deduction under section 80C for a home loan?
A. Section 80C provides a maximum deduction of Rs. 1,50,000 towards home loan as well as stamp duty and registration charges. 

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Akshatha Sajumon

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