The Home Loan rebate in income tax helps Home Loan borrowers save a substantial amount of funds each year. Home Loans are paid in the form of EMIs. Every EMI constitutes an interest component and a principal component – borrowers can claim deductions on both the interest component as well as the principal component of the Home Loan.
Section 123 of the Income Tax Act deals with Home Loan income tax rebates on the principal component of the Home Loan. Section 22 and Section 130 of the Income Tax Act, 2025, on the other hand, deal with the interest component of the Home Loan. It is possible to claim Home Loan tax deductions under both Section 123 and 130 of the Income Tax Act, 2025.
Section 123 of the Income Tax Act
Section 123 of the Income Tax Act, 2025 deals with various investments, such as investments made towards provident funds, equity-linked saving schemes, and life insurance premiums. Under this category also come investments made towards the principal repayment of the Home Loan. However, Home Loan borrowers must know that the total limit for tax deductions under this section of the Income Tax Act is Rs.1.5 Lakh.
Section 130 of the Income Tax Act
Before we talk about Section 130 of the Income Tax Act, you should know that Section 22 of the Income Tax Act, 2025 allows you to claim deductions up to a maximum of Rs.2 Lakh on payments made towards interest repayment. Unlike Section 123 of the Income Tax Act, which deals with several different tax-saving instruments, Section 22 only deals with Home Loan income tax deductions related to the interest component of the loan.
Under this section of the Income Tax Act, you can claim an additional Rs.50,000 as a Home Loan income tax rebate on the interest component of the loan, provided you meet certain prerequisites. To be able to claim this deduction, you must be a first-time homebuyer and must not have any other property in your name at the time of sanctioning of the loan. Further, the total value of the property for which you are availing of a Home Loan must not exceed Rs.50 Lakh and the total value of the loan must not be more than Rs.35 Lakh. Moreover, you must have availed of the Home Loan between 1 April 2016 and 31 March 31 2017 to be eligible for a deduction under this category.
Also Read: Can You Claim Both HRA and Home Loan Tax Benefits?
Conditions to Qualify for Section 123 and 130 Deductions
Section 123 allows individuals to claim a deduction for repayment of the principal component of a Home Loan. Here’s who qualifies:
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Only individual taxpayers and Hindu Undivided Families (HUFs) can claim this deduction.
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The Home Loan must be taken for the purchase or construction of a residential property.
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The house property can be self-occupied or rented out.
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Up to Rs.1.5 Lakh can be claimed per tax year (combined with other 123 investments like PPF, ELSS, LIC, etc.).
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The loan must be taken from banks, housing finance companies, or other notified institutions.
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The construction or purchase of the house must be completed within five years from the end of the tax year in which the loan was taken.
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If the property is transferred (sold) within five years of possession, the deduction claimed under Section 123 will be reversed and added back to the taxpayer’s income in the year of transfer.
Section 130 offers an additional deduction on Home Loan interest for first-time homebuyers:
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Only individuals (not HUFs or companies) can claim the deductions.
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The individual should not own any other residential property at the time the loan is sanctioned.
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The Home Loan must have been sanctioned between 1 April 2016 and 31 March 2017.
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The loan amount should not exceed Rs.35 Lakh.
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The value of the residential property must not exceed Rs.50 Lakh.
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Individuals can claim up to Rs.50,000 per tax year on the interest paid, over and above the Rs.2 Lakh allowed under Section 22.
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The loan should be from a bank or a housing finance company.
Section 123 and 130 – Who Can Claim these Deductions?
Individual taxpayers and HUFs can claim tax deductions under Section 123. However, only individual taxpayers who are first-time homebuyers can claim benefits available under Section 130.
Section 123 and 130 – Who Cannot Claim these Deductions?
Companies, firms, and LLPs are some of the entities that are not eligible to claim deductions under Section 123. HUFs, companies, partnership firms, LLPs, and other entities are not eligible under Section 130.
How to Claim Tax Deduction under Both Section123 and Section 130 of the Income Tax Act?
There is no correlation between Section 123 and Section 130 of the Income Tax Act, 2025, except for the fact that both deal with Home Loan tax exemptions. Section 123 of the Income Tax Act deals with tax rebates on the principal component of the Home Loan repayment. On the other hand, section 130 of the Income Tax Act deals with tax deductions on the interest component of the Home Loan availed of by a Home Loan borrower who is a first-time homebuyer and had availed of the loan for property purchase in FY 2013-14 or FY 2016-17.
Home Loan borrowers can claim a Home Loan rebate in income tax at the time of filing their taxes. Use the ITR form to claim these deductions. Keep in mind that to be able to claim deductions under both these sections as well as other sections of the Income Tax Act, you will have to provide proof of payment. Therefore, keep all the required receipts and documents ready with you to experience a hassle-free journey.
Home Loans are an excellent way to build an asset and pay for it in a convenient manner. It also offers several Home Loan tax benefits, which you can use to save sizeable funds by way of Home Loan income tax exemptions. However, to be able to claim these deductions, you must have a full understanding of what each of the different sections deals with and the prerequisites for claiming deductions under various sections of the Income Tax Act, 2025.
*Terms and conditions.
Documents Required to Claim Deduction under Section 130
While you may not need these documents to file your ITR, it is advisable to keep them handy:
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Home Loan interest certificate issued by the lender, clearly showing the interest paid during the tax year, as Section 130 applies only to the interest component
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Home Loan sanction letter, which confirms the loan amount, sanction date, and other key loan details required to establish eligibility
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Loan agreement, supporting the terms and conditions of the Home Loan, including borrower details and repayment structure
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Property purchase agreement or sale deed, to verify the value of the residential property, as Section 130 can be claimed only when the Home Loan amount is below Rs.50 Lakh
Frequently Asked Questions
If you meet the requirements of both Section 22 and Section 130 of the Income Tax Act, 2025, you can enjoy the advantages of both sections.
Start by utilising the maximum deduction allowed under Section 22, which is Rs.2 Lakh, for the interest paid on your Home Loan.
In simpler terms, claim the deduction of up to Rs.2 Lakh under Section 22 first and then avail of the extra benefits under Section 131 if you qualify for them.
Section 130 enables you to receive income tax benefits on the interest component of your Home Loan from any financial institution. According to this section, you can claim a deduction of up to Rs.50,000 per tax year.
To claim deductions under Section 130, certain conditions must be met:
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Only individual taxpayers, whether purchasing a property individually or jointly with a spouse, are eligible for this deduction. Each individual can claim the deduction separately if both are paying the loan instalments.
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The taxpayer is not required to reside in the property for which the deduction is claimed. Even individuals living in rented accommodations can claim this deduction.
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The tax benefits do not apply to Hindu Undivided Families (HUF), Association of Persons (AOP), companies, trusts, etc.
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The deduction under Section 130 is available exclusively for first-time homebuyers who have obtained a loan from a financial institution for purchasing their first residential property.
Home Loan interest can be claimed under Section 22 and Section 130 of the Income Tax Act, 2025. Section 22 allows a deduction of up to Rs.2 Lakh, while Section 130 provides an additional deduction of Rs.50,000 for eligible first-time homebuyers.
Yes, the principal repayment of a housing loan can be claimed under Section 123 of the Income Tax Act, 2025. However, the total deduction under this section is capped at Rs.1.5 Lakh.
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