First-time home buyers are more likely to finance their purchase with a mortgage, which benefits the economy by generating revenue for banks and financial institutions through interest payments. To encourage more people to buy a home, the government provides numerous tax breaks under the Income Tax Act of 1961. As a result, owning a home benefits both you and the government.
By fully utilizing all income tax benefits, you can significantly reduce your tax bill. Therefore, you should become familiar with all of the provisions and take steps to claim tax benefits under all applicable sections. This is where financial planning comes into play.
The Equated Monthly Installment (EMI) of your housing loan is made up of two parts: principal and interest. Both components entitle you to tax breaks under different sections. The interest component is deductible under Section 24, while the principal portion is deductible under Section 80C of the Income Tax Act, 1961.
The following are the top 8 ways to avail of tax benefits on home loans in 2022:
1) Tax deduction on repayment of the principal (up to Rs 1.5 lakh under Section 80C)
You qualify for a tax deduction of up to Rs 1,50,000 a year on the repayment of the principal of your housing loan. This deduction is allowed on both self-occupied and rented-out houses. Under this section, registration fees and stamp duties are also deductible. However, the catch is that the construction of the housing property should be fully completed in order for you to be eligible for this tax deduction. Also, if you go on to sell the house within five years, you will forfeit all the tax benefits you have claimed under this section.
2) Tax deduction on interest payments under Section 24
You are eligible for tax deductions on the interest paid on your housing loan under Section 24(b) of the Income Tax Act, 1961. For self-occupied housing properties, you can claim a tax deduction of up to Rs 2 lakh a year. If you have two housing loans, you can claim a maximum of Rs 2 lakh in tax deductions under this section. If your housing property is under a housing loan and is rented out, the entire amount paid towards interest is tax deductible.
3) Claim tax benefits on interest paid on under-construction property
The interest paid on home loans availed for purchasing a property under construction is eligible for tax deductions. The Income Tax Act, of 1961 provides provisions to claim deductions on interest for both pre-construction and post-construction periods. The interest paid during pre-construction is permitted as a tax deduction in five equal annual installments, starting from the year in which the construction gets completed.
4) Claim tax benefits under Section 80EE
If you are a first-time home buyer, you are eligible to claim tax deductions of up to Rs 50,000 a year on the interest payments under Section 80EE of the Income Tax Act, 1961. This deduction is over and above the benefits provided under Section 80C and Section 24. However, the cost of the purchase of the housing property must be less than Rs 50 lakh, and the loan availed should be less than Rs 35 lakh. Also, this loan should be sanctioned between 1 April 2016 and 31 March 2017. Tax benefits under this section can be claimed as long as the loan repayment is being made.
5) Claim tax benefits on interest payments under Section 80EEA
In order for you to qualify for this deduction, the housing loan must be approved by an eligible financial institution between April 1, 2019 and March 31, 2022. Under Section 80EEA, home loan borrowers get an additional deduction of Rs 1.5 lakh a year on the interest paid on the housing loan. However, the stamp duty value of the housing property should be less than Rs 45 lakh, and the individual should be ineligible for deductions under Section 80EE. The eligible taxpayers should be first-time home buyers. If the house is bought through a joint home loan, then all borrowers are eligible for this deduction, provided they meet all other criteria.
6) Claim joint home loan tax benefits under Section 24 and Section 80C
If you have jointly availed of a home loan, then all the co-borrowers of the loan will be eligible to claim tax deductions of up to Rs 1.5 lakh under Section 80C and up to Rs 2 lakh under Section 24(b) on principal and interest, respectively. However, the catch is that all the co-borrowers are required to be co-owners of the housing property purchased through the housing loan.
7) Maximize the benefits of a second home loan
Until recently, a second housing property was treated as let out, and the income generated through that property was taxed as income. However, in the 2019 Union Budget, the government decided to provide more incentives for investments in housing properties. As per this, a second housing property is also treated as a self-occupied one. According to current provisions, tax benefits can be obtained with payable interest. The entire amount paid towards the interest of the home loan is allowed as a deduction, which entails a lot more in tax savings.
8) Claim tax deductions on registration charges and stamp duty
Section 80C of the Income Tax Act of 1961 allows the expenses incurred on stamp duty and registration charges to be claimed as a deduction. You can claim these charges as a deduction in the same year as they incur.
Purchasing a housing property through a housing loan is definitely a big and long-term commitment. To reduce your tax liability, you have a range of tax deductions available under the Income Tax Act of 1961. It would only be wise to maximize the tax benefits under these provisions.