Housing loans are one of the most popular lending instruments, which are always in demand. According to research in 2020, there were more than 1.5 crore active housing loans in the affordable loan segment.
Due to this huge number and the Indian ambition to buy a home, the Indian government offers home loan tax benefits to such borrowers. Under the Income Tax Act of 1961, multiple benefits and tax rebates encourage borrowers and increase overall property investments.
The complete guide to availing tax benefits on home loans will provide you with multiple ways to reduce your income tax output. If you are someone who has an active housing loan or you are looking to apply for one, this guide can be very helpful to you.
Guide to Avail Tax Benefits on Home Loans in India
Check your Eligible Tax Rebate
Checking your eligibility to get a tax rebate is very simple. The Income Tax Act of 1961 provides loan payers with deductions under three sections. They are Section 24, Section 80C, Section 80EE & 80EEA. Under these sections, loan payers can apply for tax rebates for the principal and interest amount paid under a particular financial year.
According to Section 80C of the Income Tax Act, the loan payer can get tax rebates on the repaid principal amount. They can get a rebate of up to Rs. 1,50,000, including the charges for stamp duty and registration fees. If you have a women applicant or co-applicant, you can avail of up to 1% additional concession on stamp duty and registration charges.
The home should be entirely constructed if you want to claim this tax rebate. You are not eligible to take this rebate if you plan to sell the property within five years of its possession. If the rebate is taken, it will be reversed and added to the income for the year if you sell it within five years.
According to Section 24, the loan payer can get a tax rebate of up to Rs. 2 lakh on the interest paid against their home loan. The only criterion here is that if the house is not built within three years of taking out the loan, the person can only avail of up to Rs. 30,000 as a rebate.
If the borrower owns two homes, the total deduction must be Rs 2 lakh. If your property is lent out, there is no limit to the number of deductions you can claim depending on your interest paid. The maximum loss you can claim under this section is capped at Rs. 2 lakh. If the amount is more, it can be carried forward for eight years.
Section 80EE, & 80EEA
According to section 80EE, you can get extra tax rebates of up to Rs. 50,000 if you are a 1st home buyer and the house was bought between April 2016 to March 2017. The only requirement is that the housing loan should be under Rs.35 Lakh, and the housing property should be valued under Rs.50 Lakh.
The 2019 budget made slight adjustments to the 80EE and launched Section 80EEA, which can be availed for properties bought between the period of April 2019 to Mar 2022. Here, the loan payer can get an additional benefit of up to Rs 1,50,000. All the other criteria remain the same as Section 80EE. The only difference is that the stamp value should be Rs.45 lakhs.
Joint Home Property
If you have taken a housing loan jointly, both borrowers are eligible for tax benefits under sections 24B and 80C. It means both of these borrowers can avail of benefits up to Rs 1,5 lakh under 80C and Rs 2 lakh under 24B.
Calculating your Home Loan Tax Benefits with Example
Once you understand which section you are eligible to use, you should focus on calculating your home loan tax benefits. To do this, you will need the following figures: Loan tenure, loan amount, interest rate, loan sanction date, gross annual income, and other deductions under Section 80C/D.
Scenario 1: If you are paying a Home loan on EMI post possession
You are advantaged if you pay your home loan through equal monthly installments. The government allows such borrowers to get rebates for the interest and principal they pay.
If you have possession, you can get up to Rs. 2 lakh for the interest you have paid (Section 24B). You can get up to Rs 1.5 lakh for the principal you have paid, along with the stamp duty and registration charges, if paid in the same year (Section 80C).
Scenario 2: If you are paying a Home loan on EMI pre-possession
Interest paid before possession of a house is calculated on an aggregated basis. Whatever interest you pay before your home is built will come under Section 24 and is divided into five equal installments for five coming years until you get possession.
For example, if you have taken a loan that amounts to Rs. 20 lakh at the interest rate of 10% for 20 years in July 2014. At the same time, you will get possession in 2017.
The total EMI stands at Rs 19,300. And you have already paid 21 instalments between July 2014 – March 2016. The interest paid in these years will amount to Rs 3.45 lakh with principal amounting to Rs. 60,170
Here the total principal you paid will be divided into five equal parts, which will be claimed in the coming five years (2016-2021). This will amount to Rs 69,028 (3,45,000 ÷ 5)
Once the house was under possession in 2017, the borrower will now be eligible to claim Rs 69,028, along with their regular deduction for the current year. It will be capped at Rs. 2 lakh as per section 24B.
Once you have a clear understanding of your home loan tax benefits, you can apply them at the time of filing your next income tax return. You can provide all the necessary details to the return professional, and he will do the needful.
If you are looking for options to apply for a housing loan, Piramal Finance offers home buyers exciting perks and benefits to all applicants. You can check their website for more details.