The Income Tax Act of 1961 provides ample avenues for housing loan borrowers to save on taxes. The latest financial budget of 2023 extends the deadline for availing additional deductions on home loan interest repayments from 31st March 2022 to 31st March 2022 for loans sanctioned before 31st March 2022.
Servicing housing finance can be heavy on the pocket. However, with the added advantage of a lower home loan interest rate and more competitive terms, borrowers can restrict their credit costs to manageable limits. Furthermore, the ITA provisions accord tax rebates that can result in substantial savings each year. Hence, taxpayers must be aware of home loan tax benefits and the ways to claim them so as to lower their financial liability with relative ease.
Understanding Home Loan Tax Benefits
Your house loan instalment comprises the principal and interest components in varying proportions, both of which qualify for tax deductions. While Section 80 C of the ITA offers relief on the former, Section 24 (b) allows relaxation on the interest amount.
The table below provides a ready reckoner of the various tax benefits on a home loan:
|Income Tax Act Sections||Conditions for Deduction||Tax Deduction Limit|
|Section 80 C||Tax rebate on principal repayment sum||Up to Rs. 1.5 lakh|
|Section 24 (b)||Exemption on interest paid for a home loan, subject to completion of house construction or acquisition within five years||Up to Rs. 2 lakh|
|Section 80 EE||Extra deduction on home loans to buy one’s first residential property||Up to Rs. 50,000|
|Section 80 EEA||Tax relaxation on the interest payments, over and above the regular relief of Rs. 2 lakh under Section 24 (b), taking the net rebate to Rs. 3.5 lakh||Up to Rs. 1.5 lakh|
|Section 80 C||Income tax concession for stamp duty and registration charges||Up to Rs. 1.5 lakh|
|Joint home loans||Borrowers who jointly apply for a house loan can claim the exemptions separately doubling their tax savings||Up to Rs. 2 lakh under Section 24 (b) and Rs. 1.5 lakh under Section 80 C|
Here is a detailed look at the information tabulated above:
- Section 80 C for Principal Repayment
Home loan borrowers are entitled to make a maximum claim of Rs. 1.5 lakh on the principal repayments from their annual taxable income.
- This provision applies to self-occupied and rented properties
- It includes stamp duty and registration fees paid, which may be claimed just once in the same year of incurring the expenses
- You can avail of the rebate only after the completion of property construction
- If the house is sold within five years of gaining possession, this concession will be reversed and the deductible amount added to your income in the year of sale
- Section 24 (b) for Home Loan Interest Paid
The interest component of your house loan grants exemptions under Section 24 (b) in the following ways:
- Homeowners can claim tax relief up to Rs. 2 lakh on the loan interest paid for a self-occupied residence
- In case of a rented property, there is no upper limit on the interest sum to be claimed. If your house is let-out, the entire interest paid for purchase, construction, repair, renovation or expansion can be availed as deduction
- In the event of loss from rental income, you may obtain a maximum of Rs. 2 lakh under the ‘Income from House Property’ clause. Any leftover loss can be carried to the next financial year up to a period of eight years
- Tax Deduction on an Under-Construction Property
In certain instances, individuals may obtain housing credit and buy an under-construction property to benefit from lower market rates. But even if you commence loan repayments at that point, you can secure the interest deductions only after the construction is complete.
- You may enjoy tax exemptions on both the pre-construction and post-construction period interest under Section 24 (b)
- Pre-construction interest can be availed as tax deductions in five equal instalments, beginning from the year in which the building was completed
- The total exemption will be computed as 1/5th of pre-construction interest plus post-construction interest
- Tax Concessions Under Section 80 EE
Section 80 EE permits further relief to first-time homeowners under the conditions listed below:
- The cost of the house should be below Rs. 50 lakh while the loan amount cannot cross Rs. 35 lakh
- The loan sanction period must be between 1st April 2016 to 31st March 2017
- One can enjoy tax advantages from the fiscal year of 2016-17 onwards right until the end of loan repayments
- Section 80 EEA Deduction for First-Time House Buyers
The interest you pay on a housing loan can fetch additional benefits of Rs. 1.5 lakh if you meet the requirements mentioned here:
- The home loan must have been secured from a financial institution or housing finance company between 1st April 2019 to 31st March 2022
- The property’s stamp duty value should not exceed Rs. 45 lakh
- You should not be a beneficiary under Section 80 EE
- Applicants must not own any property at the time of loan sanction
- Tax Rebates on Joint Home Loans
Borrowers of a joint home loan can each claim tax relief individually, granting them combined reductions up to Rs. 3 lakh under Section 80 C and Rs. 4 lakh under Section 24 (b), provided both co-own the house and pay the EMIs together.
- Exemptions on a Second Home Loan
Individuals funding a second house through home loans can expect tax relaxations on the interest variable. As per earlier guidelines, while one property was deemed self-occupied, the second house could be regarded as being rented out. A notional rent was then computed and taxed as income. Currently, even a second house may be considered self-occupied.
The provisions under the Income Tax Act bring down your loan liability and maximise tax savings. Existing borrowers must remember to claim all the applicable rebates at the time of filing their annual income tax returns. If you gain significant savings through these deductions, you may consider continuing with the old tax regime. However, if you seek to avail of a home loan and file your returns according to the new tax system, you may have to forego the home loan tax benefits.
Regardless, before you choose the right lender, use a home loan EMI calculator to compare the interest rates of different lenders. This will enable you to weigh the various permutations and combinations and then pick a lender who can offer the best possible deals.