Home Loan Tax Benefit: Tax Deductions & How to Claim

A home loan helps you purchase your dream house and provides significant tax benefits under the Income Tax Act 1961. Borrowers can claim tax deductions on the principal repayment and interest payments of their EMI  under Section 80C and Section 24(b), respectively. These benefits reduce taxable income, easing the financial burden while helping achieve long-term savings and financial goals. For instance, under Section 80C, borrowers can avail of a deduction of up to Rs. 1.5 lakh annually on the principal repayment. Understanding these deductions can help maximise savings and ensure efficient loan repayment. This article gives you detailed information on housing loan tax benefits. 

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Overview of Home Loan Tax Benefits 

Home loan borrowers can benefit from several tax provisions under the Income Tax Act to reduce their taxable income. Section 24 allows deductions on the interest paid for home loans, with specific provisions for self-occupied and let-out properties. Borrowers can also claim deductions on interest paid during the pre-construction period, with the benefit starting once the construction is complete or the property is acquired. Section 80C provides deductions for principal repayment, with conditions related to holding the property for a minimum period. Taxpayers can avail of even more provisions for a deduction with the home loan.

Home Loan Interest Tax Deduction under Section 24

To avail of a home loan interest tax deduction under Section 24, the home loan must be taken for purchasing or constructing a house property. If the loan is for construction, the project must be completed within five years from the end of the financial year in which the loan was sanctioned.

The interest component of the home loan EMI can be deducted from total income, with a maximum limit of Rs 2 lakh per financial year. This deduction applies to self-occupied properties and has been in effect since the assessment year 2018-19.

For a let-out property, there is no cap on the deduction for interest paid. Borrowers can claim the entire amount of interest paid on the home loan as a tax deduction.

However, if the construction is delayed beyond the specified five-year period, the maximum deduction allowed on interest is restricted to Rs 30,000 per financial year.

Tax Deduction on Interest Paid for Home Loan During Pre-Construction Period

If you have taken a home loan for an under-construction property and are paying EMIs before moving in, you cannot claim a deduction on the interest portion until the construction is completed. However, if you purchase a fully constructed property, the deduction can be claimed immediately.

The Income Tax Act provides a provision for claiming a deduction on interest paid during the pre-construction period, known as pre-construction interest. This amount can be deducted in five equal annual instalments starting from the year in which the construction is completed or the property is acquired. This deduction is in addition to the regular deduction on home loan interest, but the total claimable amount remains subject to the Rs 2 lakh limit.

Tax Deduction on Principal Repayment under Section 80C

Under Section 80C of the Income Tax Act, the principal repayment on a home loan is eligible for a tax deduction, with a maximum limit of Rs 1.5 lakh per financial year. However, to avail of this benefit, the property must be retained for at least five years from the date of possession. If the property is sold before this period, the deductions claimed in previous years will be reversed and added to your taxable income in the year of sale.

Tax Deduction for Stamp Duty and Registration Charges under Section 80C

In addition to the deduction for principal repayment, Section 80C also allows a tax deduction for stamp duty and registration charges, subject to the overall limit of Rs 1.5 lakh. However, this deduction can only be claimed in the financial year these expenses are incurred.

Tax Deductions for Joint Housing Loan

When a home loan is taken jointly, each borrower can claim separate deductions for home loan interest and principal repayment. Under Section 24, each loan holder can deduct up to Rs 2 lakh for interest paid, and under Section 80C, up to Rs 1.5 lakh for principal repayment, provided they are also co-owners of the property. Therefore, if the loan is jointly taken with a family member, both parties can maximise their tax benefits by claiming individual deductions.

Tax Deduction Benefits for Second Home Loan

If you take a second home loan to purchase another property, you can still avail the same tax benefits as your first home loan, subject to the respective deduction limits. As per the Union Budget of 2019, the government introduced additional incentives for home property investments. Previously, only one property could be treated as self-occupied, with a second property deemed let out, leading to notional rent being calculated and taxed. However, under the new provisions, a second property can also be considered self-occupied if it is not let-out, providing tax relief on interest and principal repayments for both properties.

Learn more: Income Tax Deductions Chart 

Home Loan Tax Deductions under Section 80EE

Section 80EE provides an additional tax deduction of up to Rs 50,000 for first-time homebuyers. To claim this deduction, the following conditions must be fulfilled:

• The home loan amount should not exceed Rs 35 lakh, and the property's value should be Rs 50 lakh or less.
• The loan must have been sanctioned between 1st April 2016 and 31st March 2017.
• The borrower must be a first-time homebuyer, meaning they should not own any other property at the time the loan is sanctioned.

Home Loan Tax Deductions under Section 80EEA

To improve the housing sector, the Union Budget 2019 introduced an additional deduction under Section 80EEA for homebuyers, offering a maximum deduction of up to Rs 1.5 lakh on home loan interest. To qualify for this deduction, the following conditions must be met:

• The stamp duty value of the property must not exceed Rs 45 lakh.
• The loan must have been sanctioned between 1st April 2019 and 31st March 2022 (this deadline was extended from 31st March 2021).
• The borrower must be a first-time homebuyer, meaning they should not own any other house at the time the loan is sanctioned.
• Individuals who are claiming a deduction under Section 80EE are not eligible to claim this deduction under Section 80EEA.

Learn more: 80EE vs 80EEA: Know the Difference for Home Loan Deductions

Housing Loan Tax Benefit - Summary

In the following table, we have summarised all the deductions related to the housing loan tax benefit, 

How to Claim Tax Benefits for Housing Loan?

The following is the step-by-step process to claim tax benefits for housing loans, 

• Step 1:Prepare Required Documents - Gather essential documents, including:
• Ownership documents of the property
• Loan details, including the loan account number and sanctioned amount
• A certificate from your bank detailing the interest and principal payments made during the year
• Municipal taxes paid receipts
• Step 2: Submit Documents to Employer (for Salaried Employees) - If you're a salaried employee, submit these documents to your employer. They will adjust the TDS (Tax Deducted at Source) based on the home loan benefits, helping you save taxes throughout the year.
• Step 3: Income from House Property Calculation - If you're self-employed, you don’t need to submit the documents to anyone. Instead, you must calculate the income from the house property. This includes rental income or deemed income if the property is self-occupied.
• Step 4: File Your Income Tax Return (ITR) - To claim deductions, file your ITR and include:
• Section 80C: Deduction for principal repayment of up to ₹1.5 lakh per year.
• Section 24(b): Deduction on home loan interest of up to ₹2 lakh per year for a self-occupied property.

New Income Tax Regime on Home Loan Tax Benefits

Under the new income tax regime, home loan tax benefits are restricted compared to the old tax regime, where deductions were available without limitations. Below are the key changes:

• No deduction under Section 80C: Deductions for the principal repayment, stamp duty, and registration charges are not available.
• No deduction under Section 80EE & Section 80EEA: Additional benefits for first-time homebuyers are not applicable.
• No deduction under Section 24(b) for self-occupied property: Interest paid on a home loan for a self-occupied house is not eligible for tax benefits.
• Deduction under Section 24(b) for let-out property: Interest paid on a rented house can be claimed as a deduction.
• Set-off of loss restrictions: If the net income from a let-out property results in a loss, it can be set off against income from another house property but not against salary or income from other sources.

Conclusion

In conclusion, home loan borrowers can avail of various tax benefits under different provisions of the Income Tax Act, such as deductions on principal repayment and interest paid, which help reduce taxable income and provide significant financial relief. Sections 24 and 80C offer interest and principal repayment deductions, while additional benefits are available for pre-construction interest, stamp duty, and registration charges. Joint borrowers and second homebuyers can also maximise their tax savings. Understanding these housing loan benefits ensures borrowers can make the most of the available tax incentives, supporting their immediate financial well-being and long-term property goals.

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FAQs

1. Can I claim housing loan interest deductions for a self-occupied property under the new tax regime?

No, the new tax regime eliminates the deduction for interest paid on home loans for self-occupied properties under Section 24(b).

2. What happens if I sell my property before the five-year holding period for Section 80C benefits?

If you sell the property before completing five years, the tax deductions claimed on principal repayment under Section 80C will be reversed and added back to your taxable income.

3. Can I claim both Section 80EE and Section 80EEA deductions for the same home loan?

No, individuals claiming a deduction under Section 80EE are not eligible to claim the deduction under Section 80EEA for the same property.

4. What is the maximum deduction I can claim for housing loan interest deduction for a let-out property?

There is no cap on the deduction for interest paid on a let-out property. You can claim the entire amount of interest paid as a deduction.

5. Can I claim a deduction for home loan interest during the construction phase?

Yes, you can claim a deduction for pre-construction interest in five equal annual instalments, but this amount is subject to the Rs. 2 lakh limit under Section 24(b).

6. Are stamp duty and registration charges eligible for a separate tax deduction?

Yes, stamp duty and registration charges are deductible under Section 80C, but they are included within the overall limit of Rs. 1.5 lakh for principal repayment.

7. If I take a second home loan, can I claim the same tax benefits as for the first property?

Yes, you can claim the same deductions for both first and second home loans, provided the second property is not let out and is considered self-occupied.

8. What if the construction of my property is delayed beyond five years?

If the construction of the property is delayed beyond the specified five years, the interest deduction under Section 24(b) will be limited to Rs. 30,000 per year.

9. Can I claim deductions on both home loan principal and interest for a joint home loan?

Yes, both co-borrowers of a joint home loan can claim separate deductions for both the interest (up to Rs. 2 lakh) and principal (up to Rs. 1.5 lakh), provided they are co-owners of the property.

10. Are there any restrictions on claiming tax benefits under the new tax regime?

Yes, under the new tax regime, you cannot claim deductions for principal repayment, pre-construction interest, stamp duty, and registration charges. Only interest on let-out property is eligible for a deduction.