Availing Home Loan? Know How to Claim Income Tax Benefit

Borrowing a home loan from a bank is not a simple task, but due to the needs and wants, every individual is ready to avail of Home Loans. If you buy a 2BHK flat in a metro city, a decent house would cost you at least Rs. 1 crore. For a Rs. 1 crore house you will have to pay Rs. 20 lakh as a down payment. The remaining Rs. 80 lakh you borrow from a bank at an interest rate of 7% or above for 20 years.

Just like everything in life, there are both pros and cons of home loans. The satisfaction of owning a dream house is an accomplishment moment in life. Low home loan interest rates make home loans very attractive to potential buyers. Enjoy tax benefits on both principal amount and interest. Home loans offer several income tax benefits under the Income Tax Act, of 1961, which can significantly reduce the tax burden for borrowers. These benefits are primarily available under Income Tax Sections 24(b), 80C, 80EE, and 80EEA.

Deduction on Interest Paid on Home Loan

Section 24(b) – Deduction on Interest Paid on Home Loan. This applies to individuals who have taken a loan for the purchase, construction, repair, renewal, or reconstruction of a residential property.

• Self-Occupied Property: If the property is self-occupied one, the maximum deduction of up to ₹2,00,000 per annum on the interest paid on home loan. To acquire this, the property must be constructed within five years from the end of the financial year in which the loan was taken. If the construction or acquisition is delayed beyond five years, the deduction limit reduces to ₹30,000 per annum.
• Let-Out Property: If the property is let out, the entire interest paid on the home loan can be claimed as a deduction. However, the total loss under the head of house property that can be set off against other income is capped at ₹2,00,000. Any excess loss can be carried forward for up to 8 years to be adjusted against income from house property in future years.
• Pre-Construction Period: Interest paid during the pre-construction period can be claimed as a deduction in five equal instalments starting from the year in which the construction is completed or the property is acquired.

Section 80C of Income Tax Act: Deduction on Principal Repayment

Section 80C of the Income Tax provision provides for a deduction on certain investments and expenses, including the principal repayment of home loans.  This section applies to all individuals and Hindu Undivided Families (HUFs) who have taken a home loan for the purchase or construction of a residential property.

As per the section, the maximum Deduction one can avail of is up to ₹1,50,000 per annum on the principal repayment of the home loan. This deduction is part of the overall limit of ₹1,50,000 under Section 80C, which includes other eligible investments and expenses such as life insurance premiums, Public Provident Fund (PPF), Employee Provident Fund (EPF), National Savings Certificates (NSC), tuition fees for children, and certain fixed deposits.

It is important to note that the home loan must be taken for the purchase or construction of a new house. Loans taken for repair, renovation, or reconstruction are not eligible. The construction of the property should be completed, and the property should not be sold within five years of possession. If the property is sold within five years, the deductions claimed will be added back to the income of the year in which the property is sold. The deduction is available only if the principal repayment is made during the financial year.

The stamp duty, registration fees, and other expenses directly related to the transfer of the property are also eligible for deduction under Section 80C, within the overall limit of ₹1,50,000.

Additional Deduction on Interest for First-Time Home Buyers: Section 80EE of Income Tax Act

Section 80EE of the Income Tax Act, deals with the provision related to the additional deduction on interest paid on home loans for first-time home buyers. This deduction is over and above the benefits available under Section 24(b)of the act.

To avail of tax benefits as per the above section, the income taxpayer must be an individual (not applicable to HUFs, companies, or any other kind of taxpayer). It was important to note that the loan must be sanctioned by a financial institution or a housing finance company. It is also important that the loan must be sanctioned between April 1, 2016, and March 31, 2017. Another condition is that the value of the residential property should not exceed ₹50 lakh and the loan amount should not exceed ₹35 lakh.

As per the provision, the individual can avail maximum Income tax deduction of up to ₹50,000 per annum on the interest paid on the home loan. One can avail deduction in addition to the ₹2,00,000 deduction available under Section 24(b) for interest on a home loan for a self-occupied property.

Additional Benefit: Section 80EE provides an additional deduction specifically for first-time home buyers, helping them with the cost of home financing. The specified conditions must be met regarding the loan amount, property value, and ownership status. This Income Tax deduction can be claimed after exhausting the ₹2,00,000 limit under Section 24(b) of the act.

Example:

Suppose an individual takes a home loan of ₹30 lakh for a property valued at ₹45 lakh. The loan was sanctioned in May 2016. During the financial year, the individual pays ₹2.4 lakh as interest on the home loan. The deductions would be:

• Under Section 24(b): Deduction up to ₹2,00,000 on the interest paid.
• Under Section 80EE: Additional deduction up to ₹50,000 on the interest paid.

Since the total interest paid is ₹2.4 lakh, the individual can claim ₹2 lakh under Section 24(b) and an additional ₹40,000 under Section 80EE, totalling ₹2.4 lakh.

Additional Deduction on Interest for Affordable Housing

An additional deduction on interest paid on home loans for the purchase of affordable housing can avail under Section 80EEA of the Income Tax Act, of 1961. To avail of the additional deduction on interest, the taxpayer must be an individual (not applicable to HUFs, companies, or any other kind of taxpayer). It was important to note that the individual should not own any residential property on the date of loan sanction.

The Maximum Income Tax deduction one can avail of under the above section is up to ₹1,50,000 per annum on the interest paid on the home loan. Section 80EEA provides an additional deduction specifically aimed at encouraging the purchase of affordable housing.

If the individual is claiming a deduction under Section 80EE, they cannot claim a deduction under Section 80EEA for the same property.

Example:

Suppose an individual takes a home loan of ₹35 lakh for a property with a stamp duty value of ₹40 lakh. The loan is sanctioned in May 2019. During the financial year, the individual pays ₹2.8 lakh as interest on the home loan. The deductions would be:

• Under Section 24(b): Deduction up to ₹2,00,000 on the interest paid.
• Under Section 80EEA: Additional deduction up to ₹1,50,000 on the interest paid.

Since the total interest paid is ₹2.8 lakh, the individual can claim ₹2 lakh under Section 24(b) and an additional ₹80,000 under Section 80EEA, totalling ₹2.8 lakh.

Everyone is keen to know the Income Tax benefits in home loan interest and principal repayment while filing the Income Tax Return ( ITR ). It can significantly reduce the tax burden for individuals. As per provisions under Sections 24(b), 80C, 80EE, and 80EEA of the Income Tax Statute, the taxpayers can maximize their deductions and optimize their tax planning. It is important to understand the eligibility criteria, limits, and documentation required to claim these benefits effectively.

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