How Home Loans Help You Save on Income Tax

A home loan sounds like a mighty long-term commitment, but its pros mostly outweigh the cons. Homebuyers are invariably lured in by low interest rates, extended repayment periods, flexible/low EMIs, rising market values and the options of fixed and floating interest rates. Most of all, the idea of owning a home at affordable rates while earning major tax breaks is the biggest deal maker for homebuyers. Yet there are people who miss out on enjoying all the useful tax benefits on home loans that the government provides, simply because they’re not aware of the basic tax breaks. We simplify it all for you.

The main components of a home loan

Eligibility: Based on your monthly disposable income and credit rating, the bank decides whether you’re eligible for the loan while ascertaining that you’re in a stable financial condition to be able to repay it.

Principal Amount: This is the borrowed amount that you have to pay back. You are required to make your own contribution towards the down payment and the bank loans you 80-90% of the property value.

Interest: That’s the amount that the bank charges you for letting you borrow the money. Generally banks charge anywhere between 7 to 11% interest. 

EMI: Equated Monthly Instalment is how you pay back the principal and interest. If you fail to repay the money, the bank gets legal ownership of your home and sells it off to recover the dues.

The government, in an attempt to rejuvenate the real estate industry, reduce loan burdens and provide added relief to regular taxpayers while aiming to boost their Housing for All initiative, has provided greater home loan tax exemption in 2020. Sections 80c, 24c and 80EE  of Income Tax Act give details of various rebates and tax breaks with regards to home loans. Click the link below for more information 

Benefits under Section 80 C for principal deduction

You can claim income tax rebate on home loan principal amount for  upto Rs 1.5 lakh each year regardless of self occupied or rented property.

The total amount of payable tax itself is reduced because the deduction is made from gross income before tax calculation.

As per the rules that banks follow, you cannot sell your house for five years after buying it in order to be eligible for this deduction or else the deduction is reversed and added to the income tax again.

Benefits under Section 24 – interest amount

Whether you are occupying your own property or leasing it, you can claim up to Rs 2 lakh tax deduction of interest.

If the property was under construction when you took the loan, you are eligible for deduction if the full completion is done within 5 years; if not, you are eligible for deduction of Rs 30,000.

There’s no upper limit on the tax deduction amount allowed for rented property. You can claim the exact same entire amount that you’ve paid as interest to the bank.

Benefits under Section 80 EEA – interest amount

First time homebuyers, especially mid income families, have much to celebrate with this amendment.

You can claim an additional deduction of RS 1,50,000 if:

  • The loan is approved between April 2019 and March 2020.
  • Stamp duty value of the property does not exceed Rs 45 lakh.

Earlier, under Section 80 EE of Income Tax Act, if your loan was between April 2016 and March 2017, and the loan amount didn’t exceed Rs 35 lakh (and the property value wasn’t more than Rs 50 lakh), you were eligible for additional home loan tax benefit of Rs 50,000.

Joint loan benefits

Couples as well as members of a family usually opt to become co-borrowers so that eligibility increases when more incomes are combined.

Each co-borrower can claim deduction of up to Rs 2 lakh as interest, which means two people can claim Rs 4 lakh. In case of principal amount deduction (which is 1.5 lakh per person), two people can claim Rs 3 lakh.

Steps to claim tax benefits

1. Collect the following documents

  • Property Title Deeds
  • Construction Completion Certificate
  • Property Registration Documents
  • Home Loan certificate which contains details of EMI payment, ownership share for joint loan, etc.
  • Municipal tax paid

2. If you are salaried, submit these in form 12BB to claim benefits under Sections 80c (if you’ve paid principal amount in that year) and 24c ( for interest) to your employer who will deduct TDS accordingly and provide you Form 16.

3. If you’re self-employed, you don’t have to submit documents, but you can claim benefits while filing Income Tax Returns yearly. But you need these documents to estimate your Advance Tax Liability every quarter and present them to the IT department, if need be.

How to calculate home loan tax benefits

Online home loan tax saving calculators are the easiest way to estimate the right number. You just need to input the following details:

  • Gross annual income
  • Loan amount and start date
  • Interest paid annually
  • Principal amount paid annually
  • Gender
  • Loan tenure
  • Interest rate

FAQ- How home loans help save on income tax

1. Do I need to be a co-owner of the property to claim home loan benefits?

Yes. It’s not enough that you simply take a joint loan as a co-borrower. You should also be a co-owner of the property.

2. Can I claim tax benefits for a second home?

Yes. A second home used to be taxed as per notional rent. From 2019 onwards, a second home purchased through loan can earn you deduction as self occupied property. If both are declared as self occupied, total deduction of interest cannot exceed Rs 2 lakh.

3. What if I’ve rented out my second home?

 If you rent out the second home, you have to declare rental income, make a standard deduction of 30% on income and interest on the loan, and claim the full interest you pay on the loan.

4. Can I claim principal amount deduction for under construction property?

No. Principal amount deduction can only be claimed for completely constructed property.

5. What is pre-construction interest deduction?

It is a deduction in five equal instalments and applies for homes that are under construction. It starts from the year in which you bought the property up until the construction is completed,  not to exceed the upper limit of Rs 2 lakh.

6. Am I eligible for benefits under 80EE-A if I already own a house?

No. None of these deductions apply if the claimant owns any other property as on the date the loan is sanctioned.

7. Can I repay my loan early or hold on for tax breaks?

You can foreclose the loan before the completion of instalment tenure but you will be charged a penalty by the lender. Prepaying loans is better than to pay interest even if you’re getting tax benefits.

8. What if I missed a few EMIs?

You can still claim interest deduction since it is based on accrual basis. But deduction of principal amount is available on a paid basis, so they must be paid first.

9. What are the tax benefits for home improvement loans?

You can claim deduction of up to Rs 30,000 under the interest section but is capped within the upper limit of Rs 2 lakh. You cannot claim principal amount.

10. What’s a top-up loan? Do I get benefits?

It’s a loan for home repair, marriage, vacation, debt relief, business expansion, etc. The same benefits as above apply.

11. Can home loan interest be carried forward?

If you’ve suffered losses on self occupied or rented property, that lost money can be used to set off against income earned for the next eight consecutive years.

12. Can I claim interest on loans borrowed from friends? 

On interest deduction, not principal amount. The lender has to produce a certificate and the interest he gets is taxable.

13. Can I claim HRA and home loan benefits as well?

If you’re a salaried individual and live in a different apartment on rent, while your own is under construction, or is rented out to another, or if your home is in another city and you live on rent in another.

14. Can I claim processing fees and other charges?

Yes. They are counted as interest and can be claimed under Section 24.

15. Can I claim stamp duty and registration charges?

Yes. They can be claimed under section 80C of principal amount.

About MyGate

MyGate is India’s largest gated community management app, benefiting thousands of housing societies, developers, society facility managers, and millions of homeowners in every Indian city.

Disclaimer: Thank you for visiting our site. The information provided by MyGate (“we,” “us” or “our”) on (the “Site”) is for general informational purposes only. We strive to provide our readers with accurate information that helps learn more about the topics. It is not intended as a substitute for professional advice. We do not accept responsibility for the accuracy of information sourced from an external entity or take personal/ legal responsibility for your use of this information.

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