Claim Tax Exemptions with these 3 Loan Options

Income tax deductions are specific provisions under the Income Tax Act, 2025 that allow taxpayers to reduce their taxable income, thereby lowering their overall tax liability. These deductions are available for various expenditures and investments, such as contributions to provident funds, insurance premiums, Home Loan interest and principal payments, and medical expenses. In this article, we explore how Home Loans, Credit Linked Subsidy Schemes (CLSS), and Loans Against Property can be eligible for tax benefits. 

Home Loans

Certain Sections of the Income Tax Act, 2025, allow for tax exemptions on Home Loans as given below: 

Section 22

Section 22 of the Income Tax Act addresses the tax exemptions available on the interest component of a Home Loan. The maximum deduction for a self-occupied property is Rs.2 Lakh. However, taxpayers need to meet certain parameters to be able to claim deductions. The funds availed of through a Home Loan must be used for the purchase or construction of a residential property. Additionally, the construction must be completed within five years from the end of the financial year, in which the loan amount was disbursed.

Section 123

This Section allows for tax deductions on specific investments and expenditures including the repayment of the principal repayment of a Home Loan. The maximum deduction allowed under Section 123 per fiscal year is Rs.1.5 Lakh. 

Investments covered under Section 123

• Public Provident Fund Contributions (PPF) 
• Employees' Provident Fund Contributions (EPF) 
• Paid premiums for life insurance policies 
• Children's education tuition fees 
• Repayment of the principal component of a Home Loan
• Investing in specific bonds and schemes, such as the National Savings Certificate (NSC) and ELSS (Equity-Linked Savings Scheme) 

Section 130

Section 130 provides an additional tax exemption for first-time homebuyers of up to Rs.50,000 on Home Loan interest paid, over and above the deduction available under Section 22. 

The following conditions must be met to be eligible to claim tax benefits under Section 130: 

• A loan must have been obtained from a financial institution, such as a bank or a housing finance company, for the purchase of a residential property
• The loan amount cannot be more than Rs.35 Lakh
• The residential property's value cannot exceed Rs.50 Lakh
• The person claiming the deduction must not own any other residential property at the time the loan is obtained

Please keep in mind that deductions under Section 130 can only be claimed by first-time homebuyers and loans sanctioned by financial institutions between 1 April 2016 and 31 March 2017. 

Section 131

Section 131 of the Income Tax Act of India provides a tax deduction for first-time homebuyers in addition to the deduction provided by Section 131. Subject to certain conditions, this Section allows for a deduction of up to Rs.1.5 Lakh on Home Loan interest. The following conditions must be met to claim the deduction under Section 131: 

• A loan from a financial institution, such as a bank or a housing finance company, must have been obtained for the purchase of a residential property
• The loan amount cannot be more than Rs.45 Lakh
• The value of the residential property cannot exceed Rs.50 Lakh
• The person claiming the deduction must not own any other residential property at the time the loan is obtained 

Credit Linked Subsidy Scheme (CLSS)

CLSS (Credit Linked Subsidy Scheme) is a government initiative aimed at providing affordable housing for economically weaker sections (EWS), lower-income groups (LIG), and middle-income groups (MIG). The scheme provides interest subsidies on Home Loans used to build or purchase a new home. 

The CLSS allows eligible beneficiaries to receive a subsidy on the interest rate charged by banks on Home Loans. The interest rate subsidies range from 3% to 6.5%, depending on the beneficiary's category and loan amount. The subsidy is credited directly to the beneficiary's loan account, lowering the effective interest rate on the loan.

Loans Against Property

A Loan Against Property or a property loan is a versatile funding solution that allows borrowers to meet urgent financial requirements related to housing or business against a collateral. One can also avail of it to consolidate their debts. Based on the purpose of the loan, taxpayers can claim tax benefits under Sections 22 and 37(1). 

Also Read: Hybrid Flexi Loan vs. Personal Loan: Which One is Better? 

Purchase of a Residential Property

Tax exemptions under Section 22 apply to salaried borrowers who have availed of a Loan Against Property to fund the purchase of a new residential property. These deductions are available on the interest component of the loan, with a limit of up to Rs.2 Lakh.

Business Expenses

Tax exemptions under Section 37(1) are applicable to borrowers who have obtained funds through Loans Against Property to cover business expenses. In this case, one can claim rebates not only on the interest component but also on associated fees such as processing and documentation fees, which can be filed as business expenses while making a claim.