Buying a home comes with certain responsibilities, especially, if you take out a home loan. It will have a part of your income. What if we tell you that the Indian government offers some lucrative tax benefits to ease the burden of homeownership? Understanding the benefits can save you a lot of money and let you clear off the loan amount sooner than you expected.

 

Did you know that 25% of the Indian population benefits from the tax benefits on home loans?

 

This comprehensive guide will walk you through the income tax benefits on home loans and how to avail of them. This guide will help you go towards your path to homeownership with confidence.

 

Deduction on Home Loan Interest

Section 24 of the Income Tax Act 1961 provides a huge relief to home loan borrowers by deducting the interest amount from their taxable income. There will be a deduction of 2 lakhs annually for self-occupied properties and a deduction of 30,000 INR for properties under construction.

 

To claim the deduction, one must have the following:

 

• The loan data and purpose of the loan: Deduction will apply only for purchasing, construction, and renovation of residential properties.

 

• Property Status: A deduction of 2 lakh per year can be availed in the case of self-occupied properties. If you use the property for rental purposes, the interest amount will be deducted from the rental income.

 

• Construction Timeline – You can claim a deduction of only 30,000 RS on the interest rate for properties under construction. The deduction is applicable for five years from taking

 

• the loan. In some cases, joint ownership can affect eligibility, it is advised to consult with a tax advisor.

 

Here’s an example that best illustrates tax benefits on a home loan:

 

• Annual income: Rs. 6,00,000
• Interest paid on home loan: Rs. 2,50,000
• Standard deduction: Rs.50,000

 

First, let us calculate the taxable income without considering the home loan interest deducted.

 

• Total income: Rs.6,00,000
• Less: Standard deduction: Rs.50,000
• Taxable income: Rs.5,50,000

 

Now, let us calculate the taxable income after deducting the interest on the home loan

 

• Taxable income (After home loan deduction): Rs.5,50,000 – Rs.2,50,000 =

Rs.3,00,000.

 

Let us calculate the tax payable based on the reduced taxable income:

 

• Tax on income from Rs.2,50,001 to Rs.3,00,000 (Rs.50,000) = 5% (Rs.2500)

 

Therefore the tax payable after the home loan interest deduction would be Rs.2500.

 

Deduction for Principal Repayment

Section 80 c of the Income Tax Act stands as a shield for taxpayers in India. It allows people to claim deductions of up to Rs.1.5 Lakh for various investments and expenses such as Employee Provident Fund (EPF), Public Provident Fund (PPF), National Savings Certificate (NSC), life insurance premiums, tuition fees for children, repayment of a home loan and Equity Linked Saving Scheme (ELSS)

 

Here are some eligibility criteria for deduction:

 

• To claim the deduction, the property must be bought for purchase or construction. Loans taken for renovation and repairs will not be eligible for deduction.

 

• A maximum of Rs.1.5 Lakh can be deducted under section 80C per financial year

 

• Taxpayers must have proper documentation including loan statements and repayment schedule

 

• The primary portion of the house loan EMI is allocated towards decreasing the remaining loan balance. When taxpayers repay the principal amount, they effectively invest in their property, which is classified as a type of savings according to Section 80C.

 

• Taxpayers are eligible to claim this deduction in the same financial year in which they make the repayment. It is important to emphasize that the deduction applies solely to the amount repaid within the financial year, and not to the whole EMI amount, which encompasses both the principal and interest portions.

 

• When many individuals own a property together and borrow money jointly for a house loan, each co-owner and co-borrower can claim tax deductions based on their ownership share and loan responsibility.

 

When claiming a deduction under 80C of the Income Tax Act, there is a lock-in period associated with the property. If the property for which the home loan is taken is sold within 5 years of purchase, the deductions claimed under 80C will be reversed. This means the deduction availed will be added to the taxpayer’s income. This is to discourage people from selling the property too soon.

 

Joint Loans and Tax Benefits

• Imagine you and your friend are buying a property. To finance this you both are taking a home loan. This is called joint co-ownership and co-borrowing. When it comes to paying the tax, you both can share it with yourselves according to your share in the property. That is to say, joint loans will reduce the tax burden.

 

Additional Tax Benefits

The government offers various tax benefits to make homeownership accessible to everyone. Some of the incentives and offers include:

 

• The government of India offers tax benefits to individuals investing in affordable housing schemes. They include deductions on the interest and principal component of the loan repayment. Under section 80 EEA of the Income Tax, individuals buying affordable housing can avail of additional deductions.

 

• If you have invested in a property and using it for rental purposes, deductions cannot be applicable. However, if you have a home loan on the property, you are eligible for a deduction on the interest portion of the property. These deductions can help reduce your taxable rental income, thus saving money.

 

• When you sell a property, you may be liable to pay capital gains on any profit made from the sale. However, if you have used the property as your residence, you can get a tax exemption. Stamp duty and registration charges are levied by the government during the registration process. However, under special circumstances, you can avail of the deductions under section 80C of the Income Tax Act.

 

In short, there are a lot of government schemes that help homeowners with tax benefits to reduce the financial burden of home loans. Especially, sections 24, 80C, and 80EEA which help homeowners save money. It is crucial to understand the tax benefits before getting a home loan to save yourself a lot of money.

 

Planning to buy your dream home?

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Give us a call and our expert team will take you from there.