A Complete Guide About Tax Savings on Home Loan

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5 min 09 Jan 2023

Highlights:

Tax Benefits Available on a Home Loan
Things to Consider While Claiming Tax Benefits for a Home Loan

Home purchases require substantial capital and a housing loan is one of the preferred modes to arrange the requisite finance within a relatively short period of time. Interestingly, along with easy availability of funds that helps to create a valued asset, Home Loans are also beneficial for borrowers as they can claim considerable income tax deductions under the Indian Income Tax Act (ITA) on both the principal and interest variables of their loans. Hence, one must be aware of these taxation rules to make the most of their housing loans.

Tax Savings Tips When Availing of a Home Loan

Given below are the various sections of the Income Tax Act, 1961 that allow borrowers to enjoy several tax benefits:

Tax Exemption Under Section 24

One may avail of tax savings on their Home Loan under this particular section for the payment of loan interest. You can obtain up to Rs. 2 lakh tax relief in case your property is self-occupied and its construction is completed within five years. Otherwise, the limit will fall to Rs. 30,000. Further, if you don’t reside on the property, there is no cap on the amount that you could claim.

Tax Deductions Under Section 80C

Under Section 80C of the ITA, you can enjoy rebates up to Rs. 1.5 lakh on the principal amount of your Home Loan. However, the tax benefits stand reversed if you sell the property within five years.

Tax Relief Under Section 80 EE

Section 80 EE offers additional advantages to first-time homebuyers as they can get reductions of Rs. 50,000 against the interest paid, which is over and above the deductions granted through Section 24 and Section 80C.

Tax Savings for a Joint Home Loan

Borrowers applying jointly for a Home Loan may save a sizeable sum on their taxes together, provided both are registered as property co-owners and are also co-borrowers for the loan. They could individually enjoy tax rebates up to the maximum limit depending on their share of property ownership. For instance, if your ownership is 40% while that of your spouse is 60%, the tax deductions for each will be calculated accordingly.

They can enjoy individual rebates of Rs. 1.5 lakh on their loan, which comes to a combined deduction of Rs. 3 lakh under Section 80C towards principal repayment. Moreover, under Section 24 (b), they can together avail reductions of Rs. 4 lakh (i.e. Rs. 2 lakh each) for the interest amount.

Tax Deductions for an Under-Construction or Pre-Construction Property

Borrowers who pay EMIs during the pre-construction or under-construction phase of a property cannot secure tax benefits on Home Loan interest until the construction is complete. Thereafter, they may claim exemptions under Section 24 (b) up to Rs. 2 lakh in five equal instalments over the next five years. They can also receive tax relief up to Rs. 1.5 lakh under Section 80C on the principal amount.

Additional Read: Factors to Consider Before Applying for a Home Construction Loan

Important Points to Consider While Claiming Tax Benefits for a Home Loan

Some essential pointers that can easily augment the benefits of tax savings on a Home Loan are mentioned here:

A Bigger Interest Pay-Out Gives Higher Tax Rebates

The annual interest outgo determines how much tax you can save through deductions. If you fall in the 30% income tax bracket, you might save Rs. 60,000 annually if your interest payment each year is Rs. 2 lakh or above. Generally, if you have a lower interest pay-out, you may receive lesser tax reductions.

Consider Your Loan Amount and Tenor

Servicing a big loan amount over an extended repayment tenor may fetch higher tax relief. For example, if you are paying off a loan of Rs. 30 lakh at 7 % p.a. for 15 years, the total tax savings in 15 years could be Rs. 5.54 lakh. While a longer tenor of 30 years will give you net taxation rebates of Rs. 12.49 lakh.

At the same time, longer tenors entail an increase in the loan interest. In this case, your interest liability surpasses the corresponding interest savings. Therefore, compare the total interest after considering the tax exemptions to select your loan amount and tenor.

Partial Pre-Payments Reduce the Interest Outgo

While repaying the loan, the interest portion of your EMI decreases progressively as the principal component increases. Since the loan interest deductions cannot exceed Rs. 2 lakh, interest pay-outs made above this limit cannot fetch you tax relief. In that case, partially pre-paying your loan whenever possible may bring down the interest sum within the required range for availing the benefits. Choosing a short tenor not only lowers the interest but also lets you close the loan sooner.

Additional Read: 5 Factors to Keep in Mind When Prepaying Your Home Loan

Summing Up

There are several Home Loan tax benefits, the most significant of which is that it allows borrowers to save taxes on their Home Loans. However, one should pick the right loan amount and tenor to maximise the loan advantages, thereby securing a cost-effective Home Loan with a fast repayment schedule and optimal tax deductions. Also, before one applies for a Home Loan, it is imperative to access a Home Loan EMI Calculator and compute the overall loan cost to plan for the loan judiciously.

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