Availing of a home loan can be beneficial in more ways than one. It not only helps you own your dream home but can also significantly bring down your tax liability. Want to know more about how to save tax when buying a home? This comprehensive guide on home loan tax benefits can give you more clarity.
Tax benefits on home loans
According to the provisions of the Income Tax Act, 1961, you can claim both the home loan principal and interest as deductions from your total taxable income. The extent of the tax deductions available depends on the nature of the house property, the date you applied for the home loan, and the purpose of the loan.
Benefits under Section 80C
As per section 80C of the Income Tax Act, 1961, you can deduct the home loan principal repayments from your total income. The maximum amount that you can claim as a deduction under this section is Rs. 1.5 lakh per financial year.
Benefits under Section 24(b)
Section 24(b) of the Income Tax Act, 1961 allows you to claim the home loan interest you pay during the financial year as a deduction from your total income. The interest you can claim depends on whether the house you have purchased or constructed is self-occupied, or let out for rent.
1. Self-occupied property
If you reside in the house property, i.e., not let out for rent, then the amount of interest that you can claim will be based on the purpose for which you obtained the loan.
Loan taken for the purchase or construction of a house property
If you took the loan to purchase or construct a house, the maximum amount you can claim as a deduction under this section is Rs. 2 lakh in a financial year. However, this deduction is only available if:
- You availed the loan on or after 01.04.1999, and
- The construction or purchase of the property is completed within five years from the end of the financial year in which you availed the loan.
Other restrictions on the interest deductible
Section 24(b) of the Income Tax Act, 1961 also limits the maximum deduction amount to Rs. 30,000 if any of the following conditions are satisfied.
- If you availed the loan before April 1, 1999, for constructing or purchasing a house property.
- If you availed the loan on or after April 1, 1999, for the construction of a house property, but the construction is not completed within five years from the end of the financial year in which you availed the loan.
Loan taken for the repair or reconstruction of a house property
If the loan was taken for the reconstruction or repair of an existing house, the maximum amount you can claim as a deduction is Rs. 30,000 in a financial year, irrespective of the date on which you availed the loan.
2. Let out property
If you have let out the property you purchased for rent, the entire interest you repay on your home loan during a financial year can be claimed as a deduction. For instance, if the total interest component on your home loan during a financial year is Rs. 4.5 lakh, you can claim the entire amount as a deduction under section 24(b).
Additionally, you can claim the interest component as a deduction irrespective of whether you used the loan to purchase, construct, repair, reconstruct, or renew the house.
3. Restrictions on deductions that you can claim under Section 24(b)
Section 24(b) of the Income Tax Act, 1961, imposes certain restrictions on home loan interest deductions. Here is a quick look at what they are.
- Interest pertaining to the period before the construction or purchase of a house can be claimed as a deduction only in five equated instalments, starting from the year the purchase or construction was completed.
- From Assessment Year 2020 – 2021 onwards, home loan interest can be claimed as deductions for up to two self-occupied houses. However, the maximum amount that can be claimed shall be limited to either Rs. 30,000 or Rs. 2 lakh, depending on the purpose of the loan.
Under Section 80EE
Section 80EE of the Income Tax Act, 1961, provides an additional home loan interest deduction of Rs. 50,000 over and above the limit applicable under section 24(b). However, you must satisfy the following criteria to be eligible for this deduction.
- The loan must be taken to purchase or construct a house
- The loan must be availed during the financial year 2016 - 2017
- The amount of loan borrowed must not be over Rs. 35 lakh
- The value of the property must not be over Rs. 50 lakh
- You must not own any other residential property on the date of availing of the loan
By using the above-mentioned provisions of the Income Tax Act, 1961, you can significantly reduce your tax liability. However, you should remember that all the above-mentioned deductions are only available if you opt for the old income tax regime. If you opt for the new regime, only the deduction under section 24(b) with respect to let-out properties will be available. Therefore, consider opting for the old income tax regime to maximise the tax benefits.
**The above mentioned deductions are only available if you opt for the old income tax regime. You cannot claim these deductions if you have opted for the new income tax regime.
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