5 Simple Ways to Avail Tax Benefits on Home Loan

5 Tax Savings and Other Advantages You Can Get When You Apply for Home Loans_WC

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5 Tax Savings and Other Advantages You Can Get When You Apply for Home Loans_WC

6 min 14 Feb 2024

Highlights:

Tax Savings on Home Loan Principal and Interest Repayment
Tax Exemptions for First-Time Homebuyers
Tax Deductions on Joint Home Loans

A Home Loan can be a convenient and secure way of funding a property purchase. It also offers tax benefits that enable borrowers to save funds through tax deductions.

In this article, we will explore how one can save tax through a Home Loan.

Tax Benefits on Home Loan Principal and Interest

Home loans are repaid through Equated Monthly Instalments (EMIs), which consist of principal and interest components. Homebuyers who have availed of a housing loan can save funds through tax benefits available on both components separately as mentioned below.

1. Tax Savings on Home Loan Principal Repayment

Section 123 of the Income Tax Act, 2025 deals with tax savings on the principal component of the Home Loan. This section states that a borrower can claim deductions up to a maximum of Rs.1.5 Lakh on repayments made towards the principal component of a Home Loan.

Borrowers who have two homes and have availed of Home Loans against both properties can claim tax exemption on the amount spent towards principal repayment for both loans. However, the total tax exemption one can claim cannot exceed Rs.1.5 Lakh in a financial year. Further, Section 123 of the Income Tax Act, 2025 also deals with other tax-saving options, such as EPF, PPF, ULIP, and ELSS. The combined limit for all these tax-saving investments is Rs.1.5 Lakh.

2. Tax Benefits on Home Loan Interest Payment

Section 22 of the Income Tax Act, 2025 allows tax deductions up to a maximum of Rs.2 Lakh on payments made towards the interest component of the loan. If a borrower owns two homes that are funded through Home Loans, they can claim tax exemptions on the interest payments made towards both loans. However, the total exemption cannot exceed Rs.2 Lakh in a financial year.

3. Additional Tax Saving Measures Implemented in 2016-2017

In the financial year 2016-2017, Section 130 of the Income Tax Act, 2025 was reintroduced. Under this Section, borrowers can claim an additional deduction up to a maximum of Rs.50,000. However, to be able to claim this deduction, the borrower must meet certain terms and conditions. To start with, they must have taken a loan between 1 April 2016 and 31 March 2017. Further, the value of the property must not exceed Rs.50 Lakh and the loan amount should not exceed Rs.35 Lakh.

4. Tax Deductions for First-Time Homebuyers

A first-time homebuyer who has invested in affordable housing can claim an additional tax exemption of up to Rs.1.5 Lakh on payments made towards the interest component of the Home Loan. This tax deduction is over and above the tax exemption mentioned under Section 22 of the Income Tax Act, 2025.

However, certain conditions must be met for a person to be able to claim deductions under this Section. To start with, borrowers must have taken a Home Loan between 1 April 2019 and 31 March 2022. Further, the value of the property against which the loan has been taken must not exceed Rs.45 Lakh. Further, only borrowers who do not own any other residential property at the time of loan approval from a bank or housing finance company are eligible to claim tax benefits in this category.

5. Tax Deductions in the Case of Joint Home Loans

A joint Home Loan is a type of loan where two or more individuals are responsible for repaying the loan. These loans offer substantial tax benefits to the borrowers, provided they are also co-owners of the property.

In the case of joint Home Loans, all borrowers can claim deductions up to a maximum of Rs.1.5 Lakh on repayments made towards the principal amount and up to a maximum of Rs.2 Lakh on payments made towards the interest amount. Thus, co-borrowers who have availed of a joint Home Loan can claim a maximum of Rs.7 Lakh as tax deductions through a Home Loan.

People Also Read: Benefits of Joint Home Loan

In summary, Home Loans offer substantial tax benefits through deductions on principal repayments and interest payments under Section 123 and Section 22 of the Income Tax Act, 2025. Additional provisions such as Section 131 for first-time homebuyers who have invested in affordable housing can make Home Loans a prudent financial decision for borrowers seeking homeownership.

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