What Are the Tax Benefits on Home Loans?

Purchasing a home is a major financial commitment, and many homebuyers seek home loans to make this dream a reality. In addition to the convenience and flexibility that home loans offer, they also come with a host of tax benefits that can provide considerable relief. Whether you’re a first-time buyer or already own a property, understanding the tax benefits on home loans can help you make better financial decisions and optimize your savings.

For those unfamiliar with the nuances of home loan taxation, this guide will break down the different ways you can claim tax benefits on home loans, including deductions on both principal repayments and interest paid. As part of your overall home financing strategy, leveraging these benefits can significantly reduce your tax liability, allowing you to save more in the long run.

Tax Benefits on Home Loan – An Overview

The Indian government offers several tax advantages under the Income Tax Act of 1961 to incentivize homeownership. The two primary sections under which you can claim deductions on your home loan are Section 80C and Section 24(b). These sections enable you to reduce your taxable income and lower your overall tax outgo. Let’s explore these in more detail.

1. Tax Benefit on Principal Repayment Under Section 80C

   Under Section 80C, you can claim deductions for the repayment of the principal amount of your home loan. The total amount eligible for deduction, however, is limited to ₹1.5 lakh per financial year. This benefit is available to both first time home owners loan applicants and those who already own a property.

   It’s essential to note that the home loan apply process must involve the purchase or construction of a property, and the deduction is applicable only for loans taken for a residential property, not for any commercial property.

   Eligibility:

   • The property must be in your name, and you should be the owner or co-owner.
   • The property must not be sold within five years of possession to continue claiming this deduction.

   Thus, if you are applying for a home loan as a first-time buyer, you can benefit from principal repayment deductions, which help reduce your taxable income each year as you repay the loan.

2. Tax Benefit on Interest Payments Under Section 24(b)

   One of the most significant benefits that homeowners enjoy is the deduction on interest payments under Section 24(b). This provision allows individuals to claim a deduction of up to ₹2 lakh per year on the interest paid on the home loan, provided the loan is taken for the purpose of purchasing or constructing a house.

   For existing homeowners or first-time homebuyers, this can substantially reduce the annual tax liability, as the interest component in the early years of applying for a home loan can be quite high.

   Eligibility:

   • The property must be self-occupied.
   • The loan must be taken for the purpose of purchasing or constructing a home.

   If you’ve selected a home loan and applied online, you can still avail of this tax benefit, provided the loan fulfills the necessary criteria. Remember, you need to have the home registered in your name to claim this benefit.

3. Additional Deduction of ₹50,000 Under Section 80EE

   Section 80EE offers an additional benefit to home loan apply applicants who meet certain conditions. If you’ve taken a home loan as a first-time buyer, you can claim a further deduction of ₹50,000 on the interest paid, provided the following criteria are met:

   • The loan amount is ₹35 lakh or less.
   • The value of the property is ₹50 lakh or less.
   • The loan is sanctioned between April 1, 2016, and March 31, 2022.

   This is a great option for individuals who are buying their first home and are looking to maximize their savings on home loan interest.

4. Tax Benefits for Joint Home Loan Borrowers

   When you apply for a home loan with a co-borrower, such as a spouse or a family member, both parties can individually claim the tax benefits under Section 80C and Section 24(b). This effectively means that both the co-borrowers can claim a deduction of ₹1.5 lakh each on the principal repayment and ₹2 lakh each on the interest paid, which doubles the available benefits.

5. Tax Benefit on Pre-Construction Interest

   In case you’ve taken a home loan for property that is under construction, the pre-construction interest can also be claimed as a deduction. However, the deduction for this interest will be allowed only after the construction is completed, and the property is ready for possession.

   The amount is accumulated over the years of construction, and once the property is ready for possession, the interest paid during the construction phase can be claimed in five equal installments. The maximum limit remains ₹2 lakh per year under Section 24(b), but this will be spread out over five years.

6. Tax Benefits on Home Loan Balance Transfer

   If you move your home loan from one bank to another to take advantage of the best home loan rates or lower interest rates, the new loan will still be eligible for tax benefits under Sections 80C and 24(b). In fact, you can use a home loan balance transfer calculator to determine if this move will help you reduce your EMIs or interest payments.

   In the case of a home loan transfer, it’s essential to ensure that the balance transfer is done to another best home loan banks that offer the lowest home loan interest rates. As long as the new loan is for the same property, the tax benefits will continue, and you can enjoy the full advantages of both principal repayment and interest deductions.

7. Tax Benefits for Home Loan Top-Up

   Many individuals choose to top up home loan for renovation or any other purpose after taking the original loan. Under tax laws, the top-up loan on a home loan also qualifies for the same benefits as the original loan. You can claim deductions under Section 80C and Section 24(b) for the interest and principal repayments, if the purpose of the loan is related to the property.

   For example, if you take a top up home loan for renovation, the interest paid on the top-up loan can also be claimed under Section 24(b), provided the home is self-occupied or under construction.

Conclusion

Home loans are a convenient way to finance your dream home, but they also come with numerous tax benefits that can significantly reduce your financial burden. Whether you’re a Home loan for first-time buyers, seeking the best loan options, or a homeowner looking to transfer or top-up your loan, it’s important to understand how you can leverage these tax benefits to save more.

By taking advantage of deductions under Section 80C and Section 24(b), along with the additional benefits available for first time home owners loan applicants, joint borrowers, and home loan balance transfers, you can optimize your tax savings while paying off your home loan.

With the right planning and the help of tax benefits, owning a home becomes more affordable and rewarding in the long run.

At LoanBazaar, we aim to provide comprehensive guidance on how to make the most of these benefits, helping you save on your tax liabilities while securing the best loan options. Whether you are a first-time homebuyer or considering a balance transfer, we ensure that you have all the tools and information needed to make informed decisions.

FAQ’s

1. Can I claim tax benefits on home loan interest?

   Yes, you can claim a deduction of up to ₹2 lakh on the interest paid under Section 24(b) for self-occupied property.

2. Can first-time home buyers avail of tax benefits?

   Yes, first-time homebuyers can claim tax benefits on both principal and interest payments, along with additional benefits under Section 80EE for interest.

3. Is there a tax benefit for joint home loan borrowers?

   Yes, both borrowers can claim tax deductions separately under Section 80C and Section 24(b), effectively doubling the benefits.

4. Can I claim tax deductions on a home loan for a rented property?

   No, tax deductions on interest are available only for self-occupied or property under construction. For rented properties, different provisions apply.

5. Can I claim tax benefits for a loan taken for home renovation?

   Yes, loans taken for home renovation qualify for tax benefits on interest payments under Section 24(b), subject to eligibility.

6. CDo I need to submit proof of tax deductions for my home loan?

   Yes, you need to submit necessary documents like the loan statement, interest certificates, and proof of ownership when claiming home loan tax deductions.

7. Are there any penalties for not claiming tax benefits on home loans?

   No penalties apply for not claiming the benefits, but you lose out on potential tax savings. It’s advisable to claim all eligible deductions.