Tax benefits on home loan: How to save income tax on your home loan

By Forbes India| Jul 30, 2024

Looking to save income tax on a home loan? Learn how to secure tax benefits on home loans, discover deductions under Section 24, 80C, and more

Getting a mortgage for your dream home isn't just about owning property—it's also an intelligent move for tax savings, all thanks to the Income Tax Act of 1961. And with the Interim Budget in 2024, those savings got even sweeter.

Sure, taking out a home loan comes with costs, but it's also a golden opportunity for snagging various tax deductions, which means more money in your pocket every year. Knowing how to make the most of these deductions is absolutely crucial. Let’s learn how you can ensure tax benefits on home loans.

Deduction for interest paid for housing loan under Section 24

To qualify for a tax deduction, a home loan must be utilised to purchase or construct a house.

If the loan is for constructing a house, it must be finished within five years from the end of the fiscal year in which the loan was obtained.

_RSS_Under Section 24, the interest paid on the home loan Equated Monthly Instalments (EMIs) during the year can be deducted from your total income, with a maximum cap of Rs2 lakh.

Starting from the assessment year 2018-19, the maximum deduction for interest paid on a self-occupied house property is restricted to Rs2 lakh.

There's no upper cap for claiming tax exemption on interest for a property let out on rent. This implies that the entire interest paid on your home loan can be claimed as a deduction.

If the construction extends beyond the prescribed five-year period, you can only claim deductions on home loan interest up to Rs30,000 for the fiscal year.

However, any overall loss can be claimed under the 'Income from House Property' head against any other income head, limited to Rs2 lakh only. This deduction is applicable from the year when the house construction is completed.

Also Read: Direct and Indirect Tax in India: Differences, types

Deduction on interest paid for home loan during the pre-construction period

If you've purchased an under-construction property and are paying EMIs without having moved in yet, the eligibility to claim interest on a home loan as a deduction starts either upon completion of construction or immediately if you've bought a fully constructed property.

This doesn't imply that you wouldn't enjoy any tax benefits on the interest paid between borrowing the loan and completing construction.

The Income Tax Act permits the deduction of such interest, known as pre-construction interest.

This deduction is spread over five equal instalments beginning from the year the property is acquired, or construction is completed, in addition to the deduction you're otherwise entitled to claim from house property income. But, the maximum eligibility remains capped at Rs2 lakh.

For instance, if you've taken a home loan for construction and pay Rs10,000 in interest per month, and the house construction is completed in 2019 after two years, you can start claiming the pre-construction interest of approximately Rs2.4 lakh paid by you only after the building is completed, in five equal instalments starting from 2019.

The maximum interest deduction under Section 24(b) is capped at Rs2 lakh, including current-year and pre-construction interest.

Also Read: PPF withdrawal rules: Partial, premature and closure after maturity

Deduction on principal repayment under Section 80C

The principal amount paid on home loan Equated Monthly Instalments (EMIs) for the year qualifies for a deduction under Section 80C. The maximum allowable deduction is up to Rs1.5 lakh.

However, to qualify for this deduction, the house must not be sold within five years of possession.

If the property is sold within this period, any deduction previously claimed will be added back to income in the year of sale.

Deduction for stamp duty and registration charge under Section 80C

In addition to claiming the deduction for principal repayment under Section 80C, you can also claim a deduction for stamp duty and registration charges within the limit of Rs1.5 lakh.

However, this deduction can only be claimed in the year these expenses are incurred.

Additional deduction under Section 80EE

An additional deduction under Section 80EE is available to homebuyers up to Rs50,000. To claim this deduction, the following conditions must be met:

The loan amount must be Rs35 lakh or less, and the property's value should not exceed Rs50 lakh.
The loan must have been sanctioned between April 1, 2016 and March 31, 2017.
At the time of loan sanction, the individual must not own any other house, indicating first-time homeownership.
It's important to note that Section 80EE was reintroduced but is applicable only for loans sanctioned until 31st March 2017.

Additional deduction under Section 80 EEA

Budget 2019 introduced an additional deduction under Section 80 EEA for homebuyers to encourage the housing sector, allowing a maximum of Rs1.5 lakh.

To qualify for this deduction, the following conditions must be met:

The stamp value of the property must not exceed Rs45 lakh.
The loan should have been sanctioned between April 1, 2019 and March 31, 2022 (extended from 31st March 2021).
At the time of loan sanction, the individual must not own any other house, indicating first-time homeownership.
The individual should not be eligible to claim a deduction under Section 80EE if claiming a deduction under this section.

Home loan tax benefit: Deduction for joint home loan

For a joint home loan, each holder can individually claim deductions for home loan interest at a maximum of Rs2 lakh each and principal repayment under Section 80C at a maximum of Rs1.5 lakh each in respective tax returns.

To be eligible to claim these deductions, each loan holder should also be a co-owner of the property acquired through the loan. Therefore, opting for a jointly taken loan with family members can enable each individual to avail of an immense tax benefit.