Home loans are beneficial in many ways. They do not only simplify the process of buying a home, making it possible for people to afford their dream homes but also make borrowers eligible for home loan tax benefits with the help of which they can significantly reduce their yearly tax burden. 

Borrowers repay home loans through home loan EMIs. Each EMI that an individual pays is divided into two components. The first component goes towards the repayment of the principal part of the loan and the other component is directed towards the repayment of the interest component. Lenders first recover the majority of interest and thereafter, they start diverting the major portion of the loan EMIs to the principal repayment. 

This article discusses the various home loan tax benefits and tips on how to maximize housing loan interest deductions. 

Home Loan Tax Benefits on Principal Component Repayment of One’s Home Loan 

Individuals currently repaying a home loan can claim housing loan tax exemptions on both payments made towards the principal as well as the interest component of one’s home loan. Section 80C of the Income Tax Act deals with home loan tax benefits available on the principal component of one’s home loan. The maximum limit permissible under Section 80C is Rs.1.5 Lakh. This limit holds irrespective of the number of home loans one has. 

To maximize benefits under Section 80C, borrowers must keep two things in mind. First, they must know that if a person sells their home within five years of buying it, the home loan tax benefit they had claimed over the years under Section 80C gets reversed and added as income in the year of sale. The loan borrower then has to pay interest on this income.

Thus, if you want to make the best of the home loan benefits available to you, then never sell a home within 5 years of buying it. More importantly, to maximize home loan tax benefits, opt for a joint home loan. Married couples who opt for joint home loans can claim tax benefits separately under Section 80C.

Borrowers can also claim tax benefits under Section 80C on stamp duty and registration charges paid during the process of buying the home. Further, borrowers who have more than a single home loan can claim tax benefits on all the home loans.

However, the maximum limit permissible under Section 80C is Rs.1.5 Lakh, irrespective of the number of home loans a person has.

Home Loan Tax Benefit on Interest Component of One’s Home Loan 

Section 24b of the Income Tax Act talks about how home loan borrowers can claim housing loan interest deduction. The maximum limit permissible under Section 24b is Rs.2 Lakh, irrespective of the number of home loans a person has. However, this limit is applicable only on residential properties inhabited by the loan applicant. In the case of residential properties let out by the loan applicant on rent, there is no upper limit on how much one claim as a housing loan interest deduction. In this specific case, one can claim the entire amount due.

Further, joint home loan borrowers can maximize housing loan interest deduction by claiming tax benefits separately under Section 24b of the Income Tax Act.

As an example, a couple who has availed of a home loan together can each claim tax benefits up to Rs.2 Lakh under Section 24b, thereby maximizing the total tax deduction they can avail of under this section to Rs.4 Lakh. 

Many homebuyers invest in under-construction properties. They do so because under-construction properties are available at discounted prices and therefore, offer better returns on investment.

However, for under-construction properties, borrowers cannot claim tax deductions on interest paid during the construction phase while the construction is still going on. After the construction on the property is complete, the loan borrower can claim tax benefits on pre-construction interest in five equal instalments spread over five years.

However, claims on pre-construction and post-construction interest cannot exceed Rs.2 Lakh in any given year. 

First-time homebuyers can also claim tax benefits under Section 80EE and Section 80EEA of the Income Tax Act. Both these sections apply only to first-time homebuyers who have invested in affordable housing through a home loan.

No individual can claim tax benefits on interest payments under both these sections simultaneously. The maximum limit permissible under Section 80EE is Rs.50,000 whereas that under Section 80EEA is Rs.1.5 Lakh.

Further, each section has separate qualifying criteria and only those individuals who qualify for the eligibility requirements can claim tax benefits under these sections.

Final Words

Home finance can make your life much simpler. If you are planning to avail yourself of a home loan, make sure to avail yourself of the lowest home loan rates.

This will help ease the burden of loan repayment. More importantly, make sure to make the best use of the various tax benefits available to you and maximize savings.