Purchasing a house comes with numerous benefits, many of which are financial in nature. The Indian government has always encouraged individuals to buy houses, albeit indirectly.
On that note, the Government has made home loan repayments eligible for tax deduction under sections 80C and 24(b) of the Income Tax Act.
Whether you purchase a house for residential purposes or as an investment, it’s crucial that you understand home loan tax benefit to save a substantial amount of your yearly tax payments.
Tax Benefits On Home Loans: An Overview
There are two components of home loan EMIs – principal and interest.
When borrowers start paying their EMIs, the major portion of it goes towards interest payment. With each passing EMI, the interest component reduces, and the principal component goes up gradually. Near the end of the tenor, the lion’s share of the EMI goes towards principal repayment.
There are tax benefits on both these components separately. The tax benefits on the principal part are covered under section 80C of the IT Act, whereas section 24(b) declares tax benefits on the interest payments.
You can use an online home loan tax benefit calculator to compute the amount of tax you will save on both these components separately every year after you take a home loan.
Tax Benefits On Principal Repayment
You can claim tax exemptions on principal repayment for up to Rs. 1.5 Lakh under IT Act Section 80C. In other words, any amount within this maximum slab you pay as principal repayment on home loan gets deducted from your taxable income.
Note that this home loan tax benefit is available only after the construction of the property has been completed. Under-construction properties do not fall under the purview of tax deductions under section 80C.
Another crucial factor that you must keep in mind is that these benefits will be reversed if you sell the property within 5 years of purchase. Whatever amount you have claimed over the years will be added to your taxable income in the year that you sell it.
Tax Benefits On Interest Payment
The interest component of your EMI is also eligible for tax deductions under section 24(b) of the IT Act. The total deduction on your taxable income cannot exceed Rs. 2 Lakh per year if the property is constructed within 5 years of availing the loan.
If the construction period exceeds 5 years, this limit drops to Rs. 30,000. All these limits are for self-occupied homes. There is no upper limit on tax deductions for sublet properties.
Tax Benefits For Joint Home Loans
There are comparable tax benefits on joint home loans as well. If you avail a joint home loan with one or more of your family members, each one will be eligible for tax deductions on principal repayment of up to Rs. 1.5 Lakh and on interest payment for up to Rs. 2 Lakh.
The applicants must be co-owners of the property to avail of these tax benefits. Note that the maximum deduction allowed for all members combined is Rs. 3 Lakh and Rs. 4 Lakh on principal and interest respectively.
Approach a reliable lending institution to avail Housing Loan in India with attractive features and benefits. They offer extended repayment tenor, competitive Home Loan rates, balance transfer facility and more.
Tax benefits on a home loan make it more attractive for potential home buyers. With a clear understanding, you can save a substantial amount of tax every year.