Home Loan Tax Benefit - How To Save Income Tax On Your Home Loan?

If you are acquiring a home by taking a loan, then you can claim deductions on interest portion that you repay as a part of EMI, in accordance with the regulations of the Income Tax Act, 1961. 

While obtaining a housing loan can be costly, it is also possible to benefit from several tax deductions that can help you save money on taxes each year. It is important to understand how to maximize these benefits.

Impact of New Tax Regime on Home Loan Benefits

Home Loan benefits under the old tax regime remain the same as one can avail deductions without any restrictions, however, the under new tax regime benefits are curtailed, let’s know in detail about the same

• Deduction under section 80C for the payment towards principal component of the home loan, stamp duty, registration charges and Section 80EE, Section 80EEA are not available
• Deduction under section 24(b) for the payment towards the interest component of the home loan is not available for self-occupied property.
• However, deduction under section 24b is available for let-out property. If net income from let out property results in loss, then such loss will be allowed to set off against profit from another house property but not allowed to set off against other heads of income like salary or other sources.

Deduction for Interest Paid on Housing Loan under Section 24

A loan must be taken for the purchase or construction of a house property to claim a tax deduction. If it is taken for the construction of a house, then construction must be completed within five years from the end of the financial year in which the loan was taken.

The interest portion of the home loan EMI for the year can be claimed as a deduction from your total income up to a maximum of Rs 2 lakh under Section 24. 

From the assessment year 2018-19 onwards, the maximum deduction for interest paid on self-occupied house property is Rs 2 lakh.

For let out property, there is no upper limit for claiming tax exemption on interest, which means that you can claim deduction on the entire interest paid on your home loan. 

In case the construction exceeds the stipulated time, i.e. 5 years, you can claim deductions on interest of home loan only up to Rs 30,000 for the financial year.

Deduction on Interest Paid Towards Home Loan During the Pre-Construction Period

Say you bought an under-construction property and have not moved in yet but you are paying the EMIs. In this case, your eligibility to claim interest on the home loan as a deduction begins only upon completion of construction or immediately if you buy a fully constructed property. 

So, does this mean you would not enjoy any tax benefits on the interest paid during the period falling between the borrowing of loan and completion of construction? Yes, it will be available but with some conditions and in future years.

Let’s understand how. 

The Income Tax Act allows you to claim a deduction for such interest, which is also called pre-construction interest. You are allowed to deduct it in five equal instalments starting from the year the property is acquired or construction is completed, over and above the deduction you are otherwise eligible to claim from your house property income. However, the maximum eligibility remains capped at Rs 2 lakh.

For example, you availed a home loan in April 2021 for construction and paid an interest of Rs 10,000 a month. Construction of the house was completed in April 2023 after two years. Hence, you can start claiming the pre-construction interest of Rs 2.4 lakh (approx) paid by you only after the construction gets completed in five equal instalments starting from the year 2023-24. Maximum interest deduction under Section 24(b) is capped at Rs 2 lakh (including current year interest + pre-construction interest). So if you paid interest of Rs. 1,20,000 during the year 2023-24 then you can claim a total interest deduction of Rs. 1,68,000 (i.e., Rs. 1,20,000 as current year interest and Rs. 48,000 as 1/5th installment of pre-construction interest).

Further, if your home loan is eligible for deduction under Section 80EEA, you can claim an additional deduction of Rs 1.5 lakh over and above the limit of Rs. 2 lakhs u/s 24(b). We have discussed Section 80EEA later in this article.

Deduction on Principal Repayment under Section 80C

The principal paid on the home loan EMI for the year is allowed as a deduction under section 80C. The maximum amount that can be claimed under this section is up to Rs 1.5 lakh.

But to claim this deduction, the house property should not be sold within five years of possession. Otherwise, the deduction claimed earlier will be added back to your income in the year of sale.

Deduction for Stamp Duty and Registration Charges under Section 80C

Besides claiming the deduction for principal repayment, a deduction for stamp duty and registration charges can also be claimed under Section 80C but within the overall limit of Rs 1.5 lakh. 

However, it can be claimed only in the year these expenses are incurred.

Additional Deduction under Section 80EE

Additional deduction under Section 80EE is allowed to the home buyers for a maximum of up to Rs 50,000. To claim this deduction, the following conditions should be met:

• The amount of loan taken should be Rs 35 lakh or less, and the property’s value shall not exceed Rs 50 lakh.
• The loan must have been sanctioned between 1st April 2016 to 31st March 2017.
• And on the date of loan sanction, the individual does not own any other house, i.e. first-time house owner.

Additional Deduction under Section 80EEA

To promote the housing sector, Budget 2019 has introduced an additional deduction under Section 80EEA for homebuyers for a maximum of up to Rs 1.5 lakh. 

To claim this deduction, below mentioned conditions should be met:

• The stamp value of the property does not exceed Rs 45 lakh.
• The loan must have been sanctioned between 1 April 2019 to 31 March 2022 (extended from 31 March 2021)
• On the date of loan sanction, the individual does not own any other house, i.e. first time home buyer.
• The individual should not be eligible to claim a deduction under Section 80EEA if claiming a deduction under Section 80EE.

Deduction for Joint Home Loan

If the loan is taken jointly, each loan holder can claim a deduction for home loan interest up to Rs 2 lakh each and principal repayment under Section 80C up to Rs 1.5 lakh each in their tax returns.

To claim this deduction, they should also be co-owners of the property taken on loan. So, a loan taken jointly with your family member can help you claim a larger tax benefit.

Summary Of Home Loan Tax Benefit

Loss under the Head House Property

If you have not let-out any of your house property then there are high chances that you might incur a loss under the head house property, reason being the interest deduction that you might avail u/s 24(b). Further, even if you have rented out the property, you can incur a loss under the head house property because there is no limit on interest on home loan deductions so your interest can exceed your rental income.

If you have not let-out any of your house property then there are high chances that you might incur a loss under the head house property, reason being the interest deduction that you might avail u/s 24(b). Further, even if you have rented out the property, you can incur a loss under the head house property because there is no limit on interest on home loan deductions so your interest can exceed your rental income.

However, in any of the cases the overall loss incurred during the year under the head ‘Income from House Property’ that can be set off against any other head of income is Rs 2 lakh only. If you have incurred a loss above Rs. 2 lakhs then you cannot set off such losses during the current year, but you are allowed to carry forward such losses for 8 years and claim the same against your income from house property in future years.