A Guide to Avail Tax Benefits on Home Loans

A Home Loans help you fulfil one of your most cherished dreams - buying your dream home. As a buyer, you have more choices than before to choose your home and select your lender for funding it. However, there’s another aspect of Home Loans that makes them an attractive proposition. It’s the tax benefits on offer.

Let’s understand the various tax benefits on Home Loans that you can avail that help you lower your tax outgo.

Tax Benefit on Principal Amount of Home Loan

The EMI you pay towards your Home Loan has two components - principal and interest. Home Loan income tax rebate is allowed on both these components. Under section 80C of the Income Tax Act, 1961, you can enjoy a maximum tax rebate of INR 1.5 lakhs on Home Loan principal.

It’s essential to note that investment in other financial instruments such as public provident fund (PPF), tax-savings fixed deposits, national savings certificate, etc., also qualify for tax exemption under section 80C. The combined limit of all the deductions is INR 1.5 lakhs.

You can claim tax benefit on the principal amount of Home Loan on a payment basis, irrespective of the year for which you have made the payment.

Conditions to Claim Tax Benefit on Home Loan Principal

However, tax benefit on Home Loan principal is allowed only after completion of construction. You can’t claim deductions for the principal amount paid during the years under which the property was under construction.

Also, if you sell your home within 5 years, from the end of the financial year from which you’ve obtained possession, you can’t claim any tax deduction. In such a case, the total amount claimed as a deduction in the previous years will be deemed as your income, and you will have to pay tax on it.

Tax Benefit on Home Loan Interest

Now, let’s understand the tax benefit on Home Loan interest you can receive under section 24 of the Income Tax Act, 1961. The maximum deduction on Home Loan interest you are entitled to is INR 2 lakhs. An essential thing to note is that tax benefit on Home Loan interest is available on a payable basis. It means even if you’ve not made any payment during the year, you can claim tax benefit.

Things to Note

Note that if the property is not completed within 5 years from the end of the fiscal in which you have taken the loan, the quantum of interest benefit comes down drastically to INR 30,000 from INR 2 lakhs.

The table below summarises the tax benefits on Home Loans under section 80C and 24:

Tax Benefit on Home Loan for First-time Buyers

If you are a first-time home buyer, there are more benefits on offer under section 80EEA. You can claim an additional tax benefit of INR 50,000 on the interest paid towards your Home Loan, up and above INR 2 lakhs. However, to claim this benefit, the below conditions must be fulfilled:

• The property’s stamp value should be less than INR 45 lakhs

• The loan sanction date must be between 1st April 2019 and 31st March 2022

It’s essential to note that the deductions mentioned above are applicable only if you have opted for the old tax regime. If you have switched to the new tax regime announced in the Union Budget 2020, you will have to forgo these exemptions.

At the same time to claim the deductions, you need to furnish a statement provided by your lender that indicates the amount paid towards principal and interest. After claiming the deductions mentioned above, you need to pay tax on your balance income based on the income tax slab rates.

You can use Home Loan income tax benefit calculators available online to know the deduction you can claim towards your loan.

Things to Note While Opting for Home Loans

Now that you know the tax benefits on Home Loans, you need to be mindful of certain things before availing this all-important loan. Note that Home Loans are long-term commitments, and hence you must judiciously choose your lender. Before signing the loan papers, factor in the:

• Lender’s reputation

• Rate of interest on offer

• Repayment flexibility

• Sanction and disbursal process

• Eligibility criteria

• Facilities such as parallel funding

Also read the fine print carefully to know the various costs to make a well-informed decision.

Disclaimer:

The contents of this article are for information purposes only and not a financial advisory. The information is subject to update, revision, and amendment and may change materially.
The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject Godrej Capital or its Affiliates to any requirements.
Godrej Capital or its Affiliates shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any decisions, financial or otherwise based on the contents and information mentioned. For more information, please visit www.godrejcapital.com