December 11, 2023

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Home Loan Tax Benefits – Planning to buy your dream home? Here’s how to save tax through home loan

Home Loan Tax Benefits - Planning to buy your dream home? Here's how to save tax through home loan

Home Loan Tax Benefits: One of the most important milestones in everybody’s life is buying a dream house. And the convenient source of finance to fulfil this dream is a Home Loan.

In line with this aspiration, the government has always encouraged its citizens to invest in a home through various progressive schemes like Pradhan Mantri Awas Yojana.

But do you know, there are various tax benefits on availing a home loan under the Income Tax Act of 1961 (‘the Income Tax Act’)? It helps a person to save money on the expenditure of the taxable amount.

Here’s the expert Chief Financial Officer (CFO) of IIFL Home Finance Amit Gupta explained how to save tax through home loan:

What comprises home loan?
Home loans are strictly given for the purchase or construction of a house. It has two components – Principal amount and interest amount. One can avail tax benefits on these components under sections 80C and 24(B) of the Income Tax Act, 1961.

Tax Deduction on interest paid
Under Section 24(b), one can claim a deduction from gross income on the interest amount paid on home loan. For a self-occupied home, the person can claim the deduction of the interest amount of up to a maximum of Rs 2 lakh. Whereas for the property given on rent, there is no upper limit for claiming interest. However, the overall loss one can claim under the head ‘House Property’ is restricted to Rs 2 lakh only.

Tax Deduction on principal amount
The principal portion of the EMI paid can be claimed as a deduction under Section 80C up to a maximum of Rs 1.5 lakh. This deduction can only be availed after the construction of the residential house property is complete. Note: if you sell your property within 5 years from the end of the financial year in which possession of such property is obtained, this benefit will be reversed.

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Tax Deduction for joint home loan
If a home loan is taken jointly, each borrower can claim a deduction on home loan interest up to Rs 2 lakh under Section 24(b) and tax deduction on the principal repayment up to Rs 1.5 lakh under Section 80C. This doubles the amount of deductions available when compared to a home loan taken by a single applicant. It is however required that both the applicants should be co-owners of the property and both service the EMIs.

Deduction for stamp duty and registration charges
Besides claiming the deduction for principal repayment, a deduction for stamp duty and registration charges can also be claimed under Section 80C but within the overall limit of Rs 1.5 lakh. However, it can be claimed only in the year these expenses are incurred.

Tax Deduction Under section 80EEA for first-time buyers
Under the objective “Housing for All”, the government has introduced a new Section 80EEA to allow for an additional interest deduction for a maximum of up to Rs 1,50,000 in addition to interest deduction u/s 24(b) of Rs 2,00,000.

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Tax Deduction for second housing loan
In Union Budget-2019, the government has provided further incentives for investing in a house property. Earlier, only one property could be treated as self-occupied, and a second property was deemed to be let out; therefore, notional rent was calculated and taxed as income. However, now even a second property can be considered as self-occupied property. However, the aggregate amount of deductions is subject to the respective caps mentioned above.

Although a home loan comes with a financial cost, using loan smartly can greatly help in reducing the financial burden and help maximize tax savings.

(The information above is merely illustrative and educative in nature. Readers are advised not to rely on the same and seek independent advice from their tax consultant to compute the amount of tax deduction available to them.)