Should You Get a Home Loan to Save Your Taxes?

A Home Loan allows borrowers to build an appreciating asset while serving loans on the lowest interest rates possible and saving money through tax exemptions available on Home Loans.  

The government of India aims to promote housing for all and one of the ways it does so is by offering tax exemptions on Home Loans. So, should you take a Home Loan to save on taxes? Before we answer this question, let us look at tax exemptions allowed in the case of Home Loans.  

Tax Exemption on Principal Repayment

Under Section 80C of the Income Tax Act, borrowers can claim deductions up to a maximum of Rs.1.5 Lakh on payments made toward the repayment of the principal component of the Home Loan. However, borrowers must keep in mind that Section 80C deals with several tax-saving instruments, and home loan principal repayment is just one of these instruments.  

Tax Exemption on Interest Repayment

Under Section 24B of the Income Tax Act, borrowers can claim tax exemption up to a maximum of Rs.2 Lakh on payments made towards interest repayment. Section 24B only deals with home loan interest repayment and no other tax-saving instruments fall under this category. 

Tax Exemption in the Case of Joint Home Loans

If you and your partner or a sibling decided to take a joint home loan, in this case, both the co-applicants can claim tax exemptions separately under Section 80C and Section 24B of the Income Tax Act. Let us understand this with an example: let us assume that Mr. A took a Home Loan with his wife as a co-applicant. In this case, both Mr. A and his wife can claim separately Rs.1.5 Lakh as deductions under Section 80C of the Income Tax Act and Rs.2 Lakh as deductions under 24B of the Income Tax Act. Thus, combined, in one financial year, Mr. A and his wife can claim deductions worth Rs.7 Lakh under various sections of the Income Tax Act.  

Deductions Available to First-Time Home Buyers

Over and above the deductions mentioned above, first-time homebuyers can claim an additional Rs.50,000 as deductions under section 80EE of the Income Tax Act. However, this deduction is only available when a borrower meets certain conditions. For instance, for a borrower to be eligible for this tax exemption, the value of the home for which a Home Loan has been taken should not be more than Rs.50 Lakh and the value of the home finance taken against it must not exceed Rs.35 Lakh.  

When combined, all tax exemptions available under various sections of the Income Tax Act, allow a borrower to claim a maximum of Rs.5 Lakh in a financial year. This is a huge amount, but should you take out a home finance just to save on taxes? 

Should You Take a Home Loan to Save Taxes?

Home Loans offer several benefits and one of the biggest benefits is that they allow you to save money by way of tax benefits. However, you shouldn't take a Home Loan simply because you want to save on taxes. A Home Loan is a long-term commitment, sometimes stretching up to years. Paying EMIs for 20 to 30 years can become a burden if your financial planning lacks in any way. Further, though a It  allows you to save money by way of home loan tax benefit, know that if you opt for a long home loan tenor, you will end up paying a lot more in interest than what you will save by way of tax exemptions on home loans. Over and above this, Section 80C of the Income Tax Act considers several other tax-saving instruments. Instead of a home loan, you can use other tax-saving instruments, such as FDs, tax-saving mutual funds, etc., to save taxes.  

In conclusion, a person should take a housing loan when they are ready to become homeowners and are ready for a long-term commitment. Taking a home loan only to save taxes is a wrong approach, one that may land you in trouble in the long run. 

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