How to Get the Most Tax Benefits from Your Home Loan in India? 

Buying a house is a big step. But given the rising property costs in India, purchasing a house outright has become increasingly difficult for many people. Home loans make this dream possible for many Indians. Beyond helping you own property, home loans offer substantial tax benefits that can reduce your yearly tax bill. 

These tax breaks make home loans more affordable and can save you lakhs of rupees over time. Let us understand how to maximise these home loan tax benefits.

What is a Home Loan? 

It is the money you borrow from a bank or housing finance company to purchase or build a house. You repay this money in monthly instalments called EMIs. The EMI has two parts: principal and interest. 

A home loan usually lasts longer and is granted after the lender checks your income, credit score, and repayment ability.

The government offers home loan tax benefits on both principal and interest to encourage homeownership. These tax benefits of home loans reduce your taxable income.

Tax Benefit on Home Loans

The government offers many tax benefits on home loans to motivate people to buy homes. These include deductions on principal repayment, interest paid, and even extra benefits for first-time home buyers. 

Let’s break these down.

Section 80C: Deduction on Principal Repayment 

Here, you can claim up to ₹1.5 lakh deduction in a financial year for the principal portion of your equated monthly instalment. This includes:

• Principal repayment
• Registration charges and stamp duty, but only in the year you pay them
• This applies only to fully constructed residential property

But these benefits are only allowed if the house is not sold within 5 years of possession. If sold earlier, the claimed deductions are reversed.

This deduction falls within the total ₹1.5 lakh limit of Section 80C. 

Section 24(b): Deduction on Interest Payment

This interest on home loan deduction is a key tax-saving tool. 

• Under this section, you can claim up to ₹2 lakh per year on the interest paid for a self-occupied home.
• There is no limit to let-out or rented property. 
• The loan must be taken to buy or build the house.
• The construction must be finished within 5 years from the end of the financial year when the loan was taken.
• For a self-occupied house, if you take a loan for repairs, renovation, or reconstruction, the interest paid can be claimed as a deduction of up to ₹30,000 per year.
• For under-construction properties, the interest paid during the pre-construction phase can be claimed as a tax deduction in five equal instalments, beginning in the year the construction is completed up to ₹2 lakh per year. 

Section 80EE/80EEA: Additional Deduction for First-Time Home Buyers

These sections offer extra deductions if you are a first-time residential home buyer.

Section 80EE: Up to ₹50,000 deduction on interest paid. The deduction is available only if:

• Loan is taken between April 1, 2016 and March 31, 2017
• Loan amount ≤ ₹35 lakh and property value ≤ ₹50 lakh

Section 80EEA: Up to ₹1.5 lakh extra deduction on interest. The deduction is available only if:

• Loan is sanctioned between April 1, 2019 and March 31, 2022
• Stamp duty value of property ≤ ₹45 lakh 
• No deduction u/s 80EE has been claimed 

You can claim Section 24(b) and Section 80EE/80EEA together. This gives huge home loan income tax benefits for first-time buyers.

Tax Benefits on Joint Home Loans

If you take a joint home loan (say with your spouse or parent), both people can claim:

• Up to ₹1.5 lakh each under Section 80C
• Up to ₹2 lakh each under Section 24(b)

To claim, both must be co-owners and co-borrowers and must contribute to EMI payments. This doubles the family’s home loan deduction in income tax.

Can You Get Tax Benefits on Home Loans in the New Regime?

The new tax regime introduced in 2020 offers lower tax rates but removes most deductions and exemptions. Unfortunately, you cannot claim home loan tax benefits under the new regime. Only taxpayers can claim a deduction under Section 24(b) for the interest paid on a home loan if the property is rented out.

If you have a home loan with many tax benefits, the old tax regime might be more beneficial despite its higher tax rates. It is better to calculate your tax liability under both regimes to make the right decision.

To Wrap Up  

A home loan not only helps you buy your dream home, but it also offers many tax benefits, from income tax deductions on home loan interest and principal to extra deductions for first-time buyers. The benefits can add up to ₹3.5 lakh or more per year. 

If you are planning to purchase a house, use these home loan benefits in tax smartly to reduce your tax outgo. And if you are eligible, go for a joint home loan for even more savings.

FAQs