One of the biggest motivators to avail a home loan are the tax benefits it offers. It helps you rein-in your cash outflow by saving some taxes. Buying a home through a home loan entails several tax benefits. Let’s say you’ve decided to opt for a home loan to buy your dream home and the amount is large, understanding these tax exemptions on a home loan is crucial. When you effectively use them, you’ll be able to save some cash outflow from your income.Before we review the tax benefits of a home loan, let’s understand what entails tax benefits and what the Income Tax Act says about the claiming a deduction on your taxes.
Under section 24 of the Income Tax Act, you can claim a deduction of up to Rs.2 lakh on your home loan interest and under section 80C of the Income Tax Act, you can claim a deduction of up to Rs.1.5 lakh on the principal repayment in a single financial year.
Here’s a look at what are the different types of deductions and what benefits you can claim on your home loan.
As mentioned, there are two types of deductions you can claim on your home loan. These are:
- Deduction in Interest on Home Loan – You can claim tax deductions on the interest amount paid on the home loan from the year of the construction/ purchase of the property. To avail this tax benefit, you must purchase or construct a new house and the construction needs to be completed within 5 years of availing the loan. You can claim a maximum deduction of Rs.2 lakh under section 24 of the Income Tax Act. This can be claimed only for a self-occupied house. For interest paid on loans availed for rental or let-out home, the interest amount is deducted from the rent received. However, if the interest amount is higher than that of the rent amount, then you can claim a tax deduction.
- Deduction in Principal Repayment – The principal repayment is the amount borrowed from the lender. You can claim deductions on this principle of up to Rs.1.5 lakh from your total taxable income in the said financial year under Section 80C of the Income Tax Act. Other expenses such as registration and stamp duty fees are also eligible for deductions; however, you can avail this only when the house construction is completed and have received the possession.
- Deduction for First Time Home Buyers – First time home buyers can claim an additional deduction under Section 80EE for a maximum of Rs.50,000 for the interest paid. For this, the loan amount should not exceed more than Rs.35 lakh and the property value should not more than Rs.50 lakh.
- Deduction for Joint Home Loan – You may avail a home loan along with your spouse, friend or a relative; however, to claim deductions, you need to be a co-owner of the property on which the loan is sanctioned. Both joint applicants can claim deductions up to the full amount under Section 80C and Section 24 of the Income Tax Act. Along with a higher loan amount, extended to a joint home loan, you and your co-applicant also can take advantage of the tax benefit.
Understanding House Rent Allowance (HRA) and Home Loan
If you have opted for a home loan, but you are still living in a rented house, you can claim two deductions. You can claim the above-mentioned tax benefits under Section 80C and 24 of the Income Tax Act as well as claim tax benefits from the HRA.
Should You Consider Availing a Home Loan only for the Tax Benefit Purpose?
You may have enough funds or almost the entire amount to purchase the property, availing a home loan has its own benefits. By exercising the home loan repayment through EMIs, your creditworthiness increases accordingly. This will enable you to avail more financial products and the burden of paying off the home loan EMI will be a lot less stressful. A home loan improves your credit history as timely payments of your home loan EMIs will have a positive effect on your credit rating.
Owning your dream home is one of the biggest goals of our life. That said, most people adjust their lifestyle due to the high costs. So, if you’re availing a home loan, don’t forget to take advantage of these tax benefit to maximise your savings. This probably is your biggest investments or a home loan could take a big chunk of your monthly income, so make sure to use the tax breaks on offer.