The tax benefit is a provision in the tax code that allows home loan applicants to decrease their tax liability if they meet specific eligibility conditions. As a professional, it is important to plan for taxes, annually. Similarly, as your total income increases, it is essential to make prudent investments to curtail the tax burden. A home loan is a long-tenure investment that attracts tax deductions for the interest due on it, and it is one of many tax-saving options.
Tax benefits on home loan interest apply to both ready-for- possession and under-construction homes. In the case of under-construction homes, an applicant is eligible for tax- saving benefits if they get possession of their home within five years.
Tax benefits on interest
Section 24(b) ‘Interest on Borrowed Capital’ of the Income-tax Act of India allows a reduction in the interest paid on your home loan from a borrower’s gross income. Section 24b of the income tax act allows the deduction of interest on home loans from the taxable income. Such loans should be taken for the purchase or construction of a property. These deductions are allowed on an accrual basis and not on paid basis. Deductions can be claimed for two or more housing loans. The provisions relating to deduction under section 24(b) on account of interest on housing loan in case of self-occupied property are the same as applicable in case of let-out property. If a person owns two or more properties then the total deduction for that person remains the same.
Borrowers are eligible for tax deduction on interest paid on a self-occupied house for up to INR 2 lakh. It is applicable if the applicant has given their home on rent. Section 24(b) is not to be confused with Section 80(c) which pertains to tax deduction on the principal amount of a home loan.
Tax benefits on the principal amount
Home loan applicants can claim the deduction on the home loan principal amount under the 1961 Income Tax Act’s Section 80C. It comprises the stamp duty and registration fees payable on the house. According to this section, a borrower is eligible for a deduction of up to INR 1.5 lakh. In addition, applicants can claim it with their other tax-saving instruments such as fixed deposits, insurance premiums, provident funds, etc.
However, there is a significant limitation to this tax benefit – the property cannot be sold for five years after taking possession. The tax benefit will be put into the taxable revenue when the property is sold.
How can I make use of the available tax benefits?
A joint home loan is recommended if both the applicant and the co-applicant are salaried employees or working professionals. A joint housing loan does not merely improve home loan eligibility but also enhances total tax benefits. Both applicants can claim benefits under Section 80C for INR three lakh on the home loan principal. Furthermore, under Section 24, the full tax deduction for interest repayment of the home loan interest adds up to INR 4 lakhs from 2 lakhs.
Tax savings benefits for first-time home loan borrowers
A first-time housing loan applicant is eligible for a tax deduction on interest payments up to INR 2 lakh under Section 24. Applicants buying their first residential property can claim this home tax deduction as per Section 80 EE. This deduction has a threshold of INR 50,000 every year until the entire principal amount of the home loan is paid off. But, this deduction is solely available for home loans approved up to March 31, 2017.
To enjoy the benefit of this deduction, applicants must meet the following requirements:
- The property’s total value should be less than or up to INR 50 lakh.
- The total home loan amount must be less than INR 35 lakh.
- The applicant should not own any other property at the time of sanction of the home loan.
- A financial organization or an NBFC must approve the home loan.
Obtaining a home loan entails a long-term financial commitment in the form of monthly EMIs, but it has advantages like:
- Paying monthly EMIs on time will help enhance the credit and CIBIL score.
- It lowers the tax liability with various tax benefits.
It is possible to save a significant amount while repaying the home loan if the available tax deductions are effectively utilized. Lending institutions offer home loans starting at 6.5% per annum with different eligibility criteria.
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