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

If you are acquiring a home by taking a loan, you have several tax benefits that help reduce your tax liability, such as:

Under Section 24(b), you can claim a deduction on interest paid up to Rs. 2 lakhs for a self-occupied property. For a let-out (rented) property, the entire interest paid can be claimed as a deduction. Principal repayment up to Rs. 1.5 lakhs can be claimed as a deduction under Section 80C. First-time homebuyers can claim additional deductions on interest paid under Section 80EE (up to Rs. 50,000) or Section 80EEA (up to Rs. 1.5 lakhs), subject to specified conditions. In this article, we will discuss these benefits in detail.

Home Loan Deductions Limits- Essential Details

The maximum limits for deductions available against interest and principal paid during the financial year are presented in a table below: 

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.
• This deduction is not available if the taxpayer files his return under the new regime.
• Deduction for stamp duty and registration charges can also be claimed under Section 80C but within the overall limit of Rs 1.5 lakh. 

Deduction for Interest Paid on Housing Loan u/s 24

Interest under section 24 need not be actually paid to claim the deduction. As soon as the interest falls due for a financial year, deduction can be claimed. The following are the provisions related to interest deduction on home loan.

1. Eligibility Criteria

The following conditions must be satisfied for claiming interest deduction under section 24.

• The loan should be obtained for purchase, construction, repair* or renovation of the house property.
•  The construction should be completed within 5* years from the end of the financial year in which loan was taken.

*If the loan is availed for repair or renovation of a house, maximum deduction Rs. 30,000 can be claimed. Also, if the construction took more than 5 years, Rs.30,000 deduction can still be claimed.

2. Deduction Limits Based on Property Type

• For self occupied property: 
  • Maximum of Rs. 2 lakh interest due can be claimed as a deduction.
  • Interest paid on self occupied house property is not available under the new regime.
• For a rented out property:
  • Full interest paid can be claimed as a deduction, without any maximum limit.
  • This deduction can be claimed by the taxpayer under both old and new regime.

3. Interest Paid During Pre-Construction Period

• Pre-construction period: Time period during which property is still under construction is called pre construction period 
  
• Mechanism: Pre-construction interest is allowed as a deduction in five equal parts, beginning in the year construction finishes.
• Maximum Limit: The overall limit of 2 lakhs for self occupied property includes pre construction interest.

Illustration

You availed a home loan in April 2022 for construction and paid an interest of Rs 10,000 a month. Construction of the house was completed in April 2024 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 starting from the year 2024-25. 

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 2024-25 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).

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.

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.
• This deduction is not available if the taxpayer files his return under the new regime.

Additional Deduction under Section 80EEA

Under  Section 80EEA, deduction can be claimed by first time 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.
• This deduction is not available if the taxpayer files his return under the new regime.

Summary Of Home Loan Tax Benefit

Loss under the Head House Property

• There is a probability your house property income resulting in losses, because of interest claimed under section 24.
• This loss can be set off against income under other heads.
• However, the maximum house property losses that can be set-off against other heads is Rs. 2 lakhs only.
• Losses exceeding Rs. 2 lakhs can be carried forward for future set off.
• 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 under the new regime.