Amongst the various tax savings investments available to you today, buying the home still remains one of the most rewarding ways to reduce your tax liability. Whether you’re a first-time homebuyer or buying your second home as an investment, you can make the most of tax benefits on your home loan interest and principal.
Here are the tax savings you get when you take a home loan to finance your property purchase.
Tax savings you get under Section 80C of the IT Act on your home loan principal
You can get a deduction of up to Rs.1.5 lakh on the principal amount of your home loan when you purchase a home that is ready to move in, be it an apartment or a stand-alone house. This tax benefit is not applicable on under-construction homes or when you sell your house before the 5th year of taking possession.
If you sell your property within this time, the tax benefit is reversed, and you will pay tax on the income you gain from the sale. In case you are buying a second home, so you can get tax benefit on second home loan up to Rs.5 lakh per year on the principal. However, the same rule applies if you sell the property within 5 years from the date of possession.
Tax savings you get under Section 24 of the IT Act on your home loan interest
You can get a deduction of up to Rs.2 lakh on your home loan interest payment when you purchase a home that you plan to occupy yourself. However, this tax benefit is applicable only if the home is constructed within 5 years. If the construction takes longer, you receive tax savings up to Rs.30,000 on your home loan interest.
If you are buying a second home, you stand to save taxes on your housing loan interest if your property is constructed within 3 years. The good news for home investors is that if your home is meant for renting out and not self-occupation, then there is no limit on the tax exemption regardless of the construction timeline.
If you are buying a property that is to be constructed, then you can get tax benefits on your home loan interest in 5 installments of equal value. Claim these tax savings in 5 consecutive years, beginning from the year that your home construction starts to the year you get possession of your home.
Tax savings first-time home buyers get under Section 80EE on home loan interest
If you are a first-time homeowner, you can get additional tax benefits on your home loan’s interest over and above the savings under Section 80C and Section 24 of the IT Act. During one financial year, you can take advantage of tax deductions up to Rs.50,000 on your home loan’s interest. Remember that you get this benefit, your home’s purchase price should be under Rs.50 lakh and your home loan principal must be under Rs.35 lakh.
How to save tax if you are taking a home loan as a co-borrower
Co-borrowers on home loans can also get tax deductions under both Sections 80C and 24. So, if you are a co-borrower or taking a home loan alongside a co-borrower such as your siblings, parents, spouse or other family members ensure that you and your co-borrower’s name are mentioned as a co-owner in your property papers. This will make all co-borrowers eligible for tax savings too.
Apart from other tax-saving schemes, borrowing a home loan gives you a great advantage when it is time to file your returns. Make the most of these deductions and plan your home purchase carefully.
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