Getting a home loan is an important part of buying a home. A home loan is among the largest loans that a person takes in their lifetime. This is why it is crucial to know about home loans before taking one. Having knowledge in place will help you in every step of the way. Do you already have a home loan? Or are you planning to take one? In either case, it is essential to know the income tax benefit on a home loan. These are specified by the Department of Income Tax, India.
You can utilise the income tax benefit on home loan to maximise your savings. Here are some ways to do this:
Income tax benefits under Section 80C: Principal repayment
The equated monthly installment (EMI) that you pay to the lender has two parts. It includes the home loan amount and the interest on the borrowed amount. In the first few years of the loan, the interest payment remains higher than the principal component. However, the interest payment goes down with time.
Under Section 80C of the Income Tax Act, you can claim a deduction of up to Rs.1.5 lakh from your total taxable income in a year. This Section 80C deduction applies to your principal repayment as well. Up to Rs.1.5 lakh paid towards your home loan principal is eligible for the annual deduction.
However, you should keep these things in mind:
- You can raise a claim for this deduction after you receive possession of the house. This means you cannot file for the deduction when construction is underway.
- In addition, say, you sell the property before five years of procession. Then the tax benefit you have received will be included in your taxable income for the financial year.
Income tax benefits under Section 24: interest repayment
Section 24 of the Income Tax Act allows you to claim tax benefits on the interest repayment. The maximum amount of deduction you can get is Rs.2 lakh. However, there are certain conditions:
- The loan should be used for the purchase or construction of a new house. The maximum time limit to complete the construction is five years.
- You can claim up to Rs.30,000 as a deduction in case the construction does not start within three years of getting the loan.
- This deduction is applicable only if the property is self-occupied. For a property that is let out, the interest amount is deducted from the rent received.
Income tax benefits under Section 80EE: For first-time homebuyers
This section was unveiled in the Union Budget of 2016. Under Section 80EE, first-time homebuyers who took loans effective from the financial year 2016–17 can claim a further deduction of Rs.50,000. However, they have to meet the conditions below:
- It is applicable only to first-time homebuyers. The implication is that it has to be the first property in your name.
- The value of the property should be under Rs.50 lakh and the loan amount should be under Rs.35 lakh. In addition, only loans taken from a financial institution or housing finance company are eligible.
Summing up
It is important to know the income tax benefit on housing loan. Then you can save a significant amount of money over the years. In fact, you could also use your tax savings to reduce your home loan liability. For instance, you could use the money to make a prepayment of your loan and reduce your financial strain over the loan tenor.
