Thinking about buying a house? A Home Loan will help you out. It will help finance your dream home and get you tax benefits under three sections of the Income Tax Act. That is, Section 80C, Section 24 and Section 80EE. Want to know how you can get a tax deduction under each of these sections? Keep reading.
Are you thinking about buying a house? A Home Loan might be just the thing to help you out. It will help finance your dream home and get you tax benefits under three sections of the Income Tax Act. That is, Section 80C, Section 24 and Section 80EE. Want to know how you can get a tax deduction under each of these sections? Keep reading.
Additional Reading: Your Proven Home Loan Eligibility Checklist
Before we explain these different sections, it’s important to know what the different components of your Home Loan are.
- The Principal component
- The Interest component
The repayment of your Home Loan principal amount and the repayment of the interest on your Home Loan each fall under separate sections of the Income Tax Act. This is explained below:
Tax benefits of a Home Loan
Section 80C: Home Loan principal
For an individual or Hindu Undivided Family (HUF), the amount that goes towards the repayment of the principal on a Home Loan is eligible for a deduction under Section 80C of the Income Tax Act. You can claim a maximum of Rs. 1,50,000 under this section. Earlier this was Rs. 1,00,000.
The total amount eligible for a tax deduction under Section 80C does not just include the repayment of the principal amount on a Home Loan. This Rs. 1,50,000 limit also includes your investments made in any other investment vehicle such as EPF, PPF, Life Insurance, ELSS Mutual Funds, etc. which falls under Section 80C.
Additional Reading: Tax-Saving Investment Options Under Section 80C
Points to keep in mind
The tax benefit on the repayment of the principal of a Home Loan is provided on a payment basis irrespective of the year in which you make the payment. This means that if you do not make your payment in a particular year, you will not be able to claim any additional deduction in any subsequent year.
The stamp duty and registration charges that you pay to the municipal corporation are also eligible for a tax deduction. Even if you haven’t taken a Home Loan, you will still be eligible for this.
The tax benefit will not apply to a building that is not complete and is still under construction. Have you repaid the principal amount during the construction period? That amount will not be eligible for a tax deduction.
If you sell the property within five years from the end of the financial year from which you took possession of the property, you will not get the benefit of the tax deduction. If you have previously availed of a tax benefit, you will need to show it as income in the assessment year of the sale of the property. You will be liable to pay tax on this amount.
Section 24: Interest on Home Loan
The interest that you pay on your Home Loan is allowed as a deduction under Section 24 of the Income Tax Act. If you are receiving income from the house property, then the amount that you are paying as interest on your Home Loan will be reduced from this income. This will apply if the Home Loan has been taken for the purchase/construction of a house or the repair, renewal or reconstruction of a residential house property.
The maximum amount that is allowed as a deduction under Section 24 is Rs. 2,00,000. Earlier this was Rs. 1,50,000. In case the property for which the loan has been taken is not self-occupied, no maximum limit has been prescribed and the whole interest amount is eligible for a deduction. Keep in mind that the deduction must be calculated and claimed every year even if it has not been paid in a particular year.
Treatment of pre-construction interest
What should you do if the loan is taken while the property is still being constructed but you have already started repaying the loan? In this case, the tax deduction will not be allowed before the construction is complete.
- If the loan has been taken for the repair, renewal or reconstruction of the property, no deduction will be allowed until completion.
- If the loan has been taken for the purchase/construction of a residential property, then the interest paid must be aggregated and can be claimed as a deduction in five equal instalments in the five successive financial years after which the construction has been completed.
Moreover, in case the property has not been acquired or the construction not completed within five years of the loan being taken, then the eligible deduction amount will be reduced to Rs. 30,000 from Rs. 2,00,000.
Section 80EE: Interest on Home Loan for first-time home buyers
If you are a first-time home buyer, you will be allowed an additional Rs. 50,000 as a tax deduction. This is for the interest paid on your Home Loan under Section 80EE of the Income Tax Act. This benefit is over the Rs. 2,00,000 allowed under Section 24. However, it is subject to certain conditions.
- The value of the property for which the loan has been taken should be less than Rs. 50,00,000.
- The loan amount should be less than Rs. 35,00,000.
- The loan should have been sanctioned between 1st April 2016 and 31st March 2017.
- The loan should have been sanctioned by a financial institution or housing finance company.
- As of the date of the sanction of the loan, you should not own any other residential property.
- You can benefit from this deduction for the entire repayment period of the loan.
Additional Reading: Home Loan Guide For First-Time Home Buyers
In order to claim tax benefits under the above sections, you will need to provide a statement from the lender clearly showing the amount that is payable and has been paid towards the principal and interest. Once these deductions have been made, you will be taxed as per the tax slab that you fall under.
Now you know all about the tax benefits that you can get when you take a Home Loan. How about finding out what different Home Loan options you have? Not only will you be able to compare across lenders, you might also be eligible for a Rs. 10,000 gift voucher from Amazon* on disbursal of your loan. Hit the button below to check.