A home loan is associated with a prolonged financial burden. This is not without reason. Your savings can really take a blow when you make the down payment to buy a house. At the same time, you commit to paying equated monthly instalments (EMIs) for several years to come. These are expenses that you cannot avoid if your vision of a fulfilled life features a home to call your own. But a home loan can also boost your savings by making you eligible to claim tax benefits. Say, you take a home loan from the banks/non-banking financial companies. You could get Rs.3.5 lakh worth of tax benefits on home loan in India under certain conditions. Here’s a look at how this might work.
Home Loan Tax Benefit on Principal Amount
According to Section 80C of the Income Tax Act, 1961, you can claim tax benefits on the principal amount of your home loan. You can get a tax deduction of up to Rs.1.5 lakh. The amount is Rs.2 lakh in case of a senior citizen.
But the tax deductions are possible only if construction of the house or property is complete.
Some Points to Keep in Mind:
- It has to be your first house and it should be self-occupied.
- You can claim benefits for your first house even if it is vacant or let out if you are living in a different city for work.
- There are no tax benefits on the principal amount for a second house or an additional property.
Home Loan Tax Benefit on Interest Amount
You can claim a home loan tax benefit of up to Rs.2 lakh on the amount of interest paid. Here are the conditions that govern your claims, as per Section 24 of the Income Tax Act.
- You can claim tax benefits on the interest paid or Rs.2 lakh, whichever is lower. But in order for you to be eligible to make this claim, a condition must be fulfilled. The property should have been constructed within five years from the financial year in which the loan had been approved. The maximum tax deduction is Rs.3 lakh for senior citizens.
- What if the construction of the house is not completed within five years of the approval of the loan? In that case, the tax exemption will come down to Rs.30,000.
- For a home loan of up to Rs.35 lakh for a house that costs up to Rs.50 lakh, buyers are eligible for an additional tax exemption. This amounts to Rs.50,000, as per Section 80EE of the Income Tax Act.
- For home loans taken for renovations or repairs, the borrowers can claim a tax deduction of up to Rs.30,000 per year. This is available under Section 24(b) of the Income Tax Act.
What about properties that are under construction? The buyer can claim the interest paid in equal parts through the five years after the completion or the possession of the property. The yearly upper limit for such a claim is set at Rs.2 lakh.
Ways to Increase the Benefits
- You could co-borrow the loan amount with your spouse or close relative and then co-own the property with the same person. Here, you can each claim full benefits on both the principal and the interest amounts paid. The resulting benefits can lighten the burden of repaying the loans to an extent.
- Say, you buy your first house with a loan while living elsewhere on rent. In this case, you can claim tax exemptions for both the home loan and the rent.
You can also claim tax deductions for personal loans, education loans, and car loans under different sections of the Income Tax Act. However, the benefits on home loans are the greatest.
If you are planning to take a home loan to buy your first house, be aware of the tax benefits in India. You should also take a close look at the current housing loan interest rate on different housing loan products. You could do this by comparing the rates offered by various financial institutions.