Every citizen of India must pay taxes. The government uses the tax money to provide citizens with basic amenities as well as fund welfare projects for the needy.
The government of India also offers certain tax benefits to help individuals save on their annual taxes. If planned well, using these tax rebates, borrowers can save a considerable amount of money each year. If you are unaware of tax benefits on Home Loans, this article is a must-read for you.
These days, most buyers seek financial assistance in the form of a Home Loan to realize their dream of becoming homeowners. Real estate prices have catapulted rapidly over the last few years, making it nearly impossible for people to afford a home without external financial assistance.
A creditworthy borrower can easily get a lender to sanction anywhere between 80% to 90% of a property’s value as a home loan. The borrower then repays this loan in the form of EMIs, which constitute a principal component and an interest component. Section 80C of the Income Tax Act deals with tax rebates on both of these components.
So, what tax benefits on Home Loans are available to Home Loan borrowers? This article’s next section answers this question.
Table of Contents
Home Loan Tax Benefits Borrowers Must be Aware of
Tax Deductions Available on Interest Repayment
Section 24 of the Income Tax Act deals with tax exemptions available on payments made towards interest repayment.
Home Loan borrowers can claim tax deductions up to a maximum of Rs.2 Lakh each year of their loan tenor on payments made towards the interest component repayment of the Home Loan.
If a borrower owns two homes and has taken two Home Loans, they can claim tax exemption on payments made towards the interest component of both loans. However, the total tax exemption that one can avail under this category cannot exceed Rs.2 Lakh.
Further, borrowers must also know that while section 80C of the Income Tax Act deals with several different tax-saving instruments, section 24b deals solely with the interest component of a Home Loan.
Tax Deductions Available on Principal Amount Repayment
Section 80C of the Income Tax Act deals with tax rebates on deductions available on principal amount repayment. Under this section of the Act, a borrower can claim tax exemption on a home loan up to a maximum of Rs.1.5 Lakh on payments made towards principal repayment.
If a borrower has more than one home (it does not matter whether the second home is self-occupied or has been rented out), the Home Loan borrower can claim tax deductions on payments made towards the principal repayment of both homes. However, borrowers must keep in mind that the combined limit for tax deductions on all Home Loans is Rs.1.5 Lakh under this category.
Tax Benefits Available on Joint Home Loans
Over the last couple of years, the government of India has been taking conscious efforts to increase female homeownership. One of the ways the government is doing so is by offering special incentives to women homeowners, such as low Home Loan interest rates and added tax exemptions.
If a couple co-borrows a Home Loan, both the partners can avail of tax exemptions separately under various sections of the Income Tax Act.
In other words, both partners can avail of tax exemptions up to a maximum of Rs.1.5 Lakh under section 80C of the Income Tax Act and up to a maximum of Rs.2 Lakh under section 24b of the same act. Combined, both partners can claim tax exemptions up to a maximum of Rs.7 Lakh by way of a Home Loan.
Tax Benefits Available on Affordable Housing
Home Loan borrowers can claim an additional Rs.50,000 as a tax rebate under Section 80EE of the Income Tax Act. However, to be able to claim this deduction, one must meet certain criteria.
To start with, the value of the home they have purchased must not exceed Rs.50 Lakh and the value of the home loan taken to buy the home must not exceed Rs.35 Lakh. Further, the stamp value of the property must be no more than Rs.45 Lakh and the borrower must have applied for a home loan between 2019 and 2020.
Over and above the tax exemptions mentioned above, there are a few other tax exemptions available to home loan borrowers. For instance, if one takes a home loan to buy an under-construction property, one can claim tax deductions on the interest payments made during the construction period in five equal instalments after the completion of the construction.
Similarly, any first-time home buyer who had availed of a home loan up to a maximum of Rs.35 Lakh in the year 2016-2017 is eligible to claim an additional Rs.50,000 over and above the stipulated Rs.2 Lakh tax deduction under section 80EE of the Income Tax Act.
In conclusion, when planned well, a home loan does not only allow borrowers to become homeowners in a stress-free manner, but it also does so by giving them a chance to save considerably on their yearly taxes. But how does one claim these tax exemptions? The last section of this article answers this question.
Keep These Things in Mind If You Wish to Avail of the Tax Benefits Discussed Above
To be able to benefit from the tax exemptions mentioned above, you must meet the following conditions:
The property against which you have taken a home loan must be registered in your name.
The property must be fully constructed.
You will be required to submit all home loan documents along with your ITR to avail of these benefits. So, make sure to get every document you will need from your lender before beginning to file your ITR.
You will also be required to submit a certificate that elaborates on the payments made by you towards principal and interest component repayment from your lender.
Final Words
A home loan is an excellent way to build an asset as well as save taxes. Use a home loan EMI calculator to work out the home loan amount you are eligible for and a home loan income tax calculator to understand the tax amount you can save each year through your home loan.
