Buying a home is a cherished dream for many of us. Realizing this dream, however, is a challenging task. If not for a home loan, many of us can’t afford a home early in life. So, what is a home loan? A home loan is a loan sought from any financial institution to purchase a property. It is typically long-term and is repaid over several years. A home loan is generally a person’s biggest financial obligation. While you pay interest on the loan you seek, you also get tax benefits when availing a home loan. This blog talks about the tax benefits of home loans. 

Tax Benefits on Home Loan

Tax Deduction on Interest Paid on Home Loan

A home loan borrower can reduce their taxable income by claiming a deduction on the interest paid on their home loan. The property should either be self-occupied or vacant. Section 24 of the Income Tax Act provides a deduction of up to Rs 2,00,000 on interest payment for a home loan in a financial year while tabulating their total taxable income. If the property is rented out, the total interest is allowed for deduction. 

Tax Deduction on Principal Repayment

Under Section 80C of the IT Act, you may claim a deduction of up to Rs. 1.5 lakh on principal repayment of the home loan. You may also include stamp duty and registration fee, which may be claimed only once in the year in which it was incurred. Here, the home loan must be taken to either buy a new house or construct one.

You may note that if you sell the property within five years from the end of the year in which it was bought, all tax benefits availed earlier will stand reversed. That amount will be adjusted in your income in the year in which you sell such property.

Deductions on principal and interest amounts are the two most popular tax benefits available on home loans.

Additional Tax Benefits for First-Time Homebuyers

There are additional tax benefits on home loans for first-time homebuyers. In 2019, Section 80EEA was introduced, where first-time homebuyers can claim tax deductions of up to Rs. 1.5 lakh on the interest paid on affordable housing loans. However, this deduction under Section 80EEA is not available on and after April 1, 2022.

The stamp duty value of the property should not exceed Rs. 45 lakh. Also, this should be your first property, and you cannot own any residential property when the loan is sanctioned. 

Tax Benefits on Affordable Housing

For affordable housing, there are tax benefits on home loans, too. The Govt. under the PMAY gave a boost to the affordable housing segment in 2019. In the affordable housing category, the buyers get an additional deduction of Rs 1.5 lacs under Section 80 EEA other than a deduction of up to Rs 2 lakh under Section 24 of the IT Act. This concession may be availed if the house is not more than 45 lakh and the carpet area of the house is less than 645 sq ft in metropolitan cities of Bengaluru, Chennai, Delhi NCR (Delhi, Noida, Greater Noida, Ghaziabad, Gurgaon, Faridabad), Hyderabad, Kolkata and Mumbai (whole of Mumbai Metropolitan Region). For any other city, the carpet area must be less than 968 sq ft.

This concession applies to the home loans sanctioned on or before March 31, 2022.

Tax Benefits on Joint Home Loans

Here, the pre-requisite is that you must be a co-applicant and a joint owner to claim tax benefits on a joint home loan. Avail benefits in three ways:

Section 80C: A tax deduction of up to Rs. 1.5 lakhs can be claimed every year on the principal component of the housing loan until loan maturity. 

Section 24 (b)

If the home is self-occupied, a tax deduction of up to Rs. 2 lakhs can be claimed on the interest component of the home loan by you and the co-owner, each under this section every year. If the property is rented, your co-owner and you will be eligible for an annual tax benefit of Rs. 1 lakh each.

Section 80 (EE)

For a first-time borrower, avail an additional Rs. 50,000 tax benefits on interest repayment for each member. Here, the property value must be more than 50 lakh, and the loan amount should be less than Rs 35 lakh. 

Maximizing Tax Benefits

When purchasing a home, availing a loan not only lets you become a home-owner early in life but also offers tax benefits in the form of deductions in different categories. So, you purchase an asset and get tax benefits on the loan amount, too. Use this handy guide to maximize your tax benefits.

Buying a home is a huge financial obligation. Knowledge of tax benefits when availing a home loan will allow you to make your home-buying decision easier. Even when the loan is jointly taken, the benefits may be enjoyed by both joint owners. Maximize your gains, keeping in mind the above-said pointers.