Tax Benefits of Home Loan

HOUSING | Tips & Advice 18 November 2021

In order to encourage more people to invest in houses, there are many tax deductions one can avail. Here are the home loan tax benefits that you should know about.

Tax Benefits of Home Loan

Tax benefit for interest paid on home loan

A home loan is taken usually for the purchase or construction of a house. These home loans are repaid in the form of EMIs (Equated Monthly Installments) over a period of time. Every EMI has two components - the interest and the principal amount. A taxpayer can claim tax deductions on the total amount of interest paid in a single financial year. For a "self occupied" property, the maximum limit for income tax rebate is Rs. 2 lakh. Self-occupied properties are the ones where you live. However, there is no limit for properties bought on home loan and let out.

Tax benefit for interest paid for property under construction

This is applicable when the property you bought is under construction or construction is yet to begin. In order to be eligible for such tax deductions, the construction must be completed within 5 years of availing the loan.

The Income Tax Act (ITA) allows people to gain tax benefits on such types of interest, known as "pre-construction interest". The pre-construction interest is deducted yearly on top of the total interest paid. It is deducted in five equal Installments. It is eligible from the time when the property was acquired to the time when the construction was completed.

Tax benefit on principal repayment

Apart from the tax deduction on the interest paid, you can also claim for tax benefits on the principal amount of the EMI paid in a year. This is mentioned in Section 80C of the Income Tax Act. The total tax rebate is capped at Rs. 1.5 lakh a year. This is mentioned in Section 80C of the Income Tax Act. The maximum rebate that you can receive is capped at Rs. 1.5 lakh.

Here are the conditions under which you can avail tax deductions on the principal amount of your EMI:

  1. This benefit is only applicable after the construction period is over. Unlike the tax deduction on the interest paid, this is not allowed during construction.
  2. In order to be eligible for this, you must not sell the house within 5 years of buying it. On selling it within 5 years of acquisition, the deductions will be added to your total income on the year of sale.

Deduction for stamp duty and registration charges

While buying a property, stamp duty charges amount to a huge number. So does the registration charge. Under Section 80C of the Income Tax Act, you can also enjoy deductions on stamp duty and registration charges. It is eligible only for the year in which these amounts are paid.

Extra tax benefits for first time home buyers

For first time buyers, there are special housing loan tax benefits. As per the provisions of Section 80EE, all first-time buyers are eligible for an additional tax deduction of up to Rs. 50,000. This is separate from the tax benefits on the interest and principal amount of the home loan EMIs. Therefore, this benefits people to buy their first home even more.

Here are the conditions under which tax deductions on the first home loan interest can happen:

  1. The loan applicant should not own any other property at the time of loan application. The house for which the loan is being taken should be their first owned property.
  2. The worth of the property should not be over Rs. 50 lakhs.
  3. The loan amount granted should be Rs. 35 lakhs or less.

Tax deductions for joint home loans

If the home loan is taken jointly, then each of the co-owners of the property can claim a deduction on the interest paid and principal repayment.

Tax benefit on home loan for owning second property

If you take a home loan for owning a second property, then you are also eligible for tax deductions. The benefit is dependent on whether the property is considered a self-occupied property or a lent out property. Under Section 24(b), tax benefit available on self-occupied property is capped at Rs. 2 lakh. For lent out properties, there is no limit.

Now that you know how to save tax on home loan, you can explore different home loan options at Piramal Capital Housing and Finance.

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