For most people, owning a home is a dream come true. The Indian government has always favoured encouraging citizens to invest in real estate, which is why a home loan qualifies for a Section 80C tax deduction. And when you buy a house with a home loan, you get a slew of tax benefits that cut your tax bill significantly.
Many schemes, such as the Pradhan Mantri Jan Dhan Yojana, are shining a bright light on the Indian housing sector by attempting to address issues of affordability and accessibility. This blog will focus on all the tax benefits you get on a home loan.
Tax benefit on interest paid on housing loan
A home loan is required for the purchase or construction of a home. If you pay an EMI for a home loan, it has two components:
- Payment of interest
- Principal repayment
Section 24 allows you to deduct the interest portion of your EMI payments for the year up to a maximum of INR 2 lakh from your total income.
The maximum deduction for interest paid on self-occupied house property is INR 2 lakh beginning with the fiscal year 2018-19.
There is no upper limit for claiming interest on rented property.
However, the total deduction that can be claimed under the heading ‘House Property’ is limited to INR 2 lakh.
This deduction is available beginning with the year the house construction is completed.
Deduction on interest paid towards home loan during the pre-construction period
Assume you purchased an under-construction property but have yet to move in. However, you are paying the EMIs. In this case, your eligibility to deduct interest on a home loan begins only after construction is completed or immediately if you purchase an entirely constructed property.
So, does this mean you won’t get any tax benefits on the interest you pay between the time you borrow the money and the time you finish building? No.
Let’s take a look as to what the case is.
The Income Tax Act allows for a deduction for such interest, known as pre-construction interest. Over and above the deduction you are otherwise eligible to claim from your house property income, a deduction in five equal installments beginning with the year the property is acquired or construction is completed is allowed. However, the maximum eligible amount remains at INR 2 Lakh.
For example, suppose you have a home loan for construction and pay INR 12,000 in interest each month. After two years of construction, the house was finished in 2019. As a result, you can claim the pre-construction interest of INR 2.88 Lakh only after the building is completed in five equal installments beginning in 2019. Section 24(b) limits the maximum interest deduction to INR 2 Lakh (including current year interest and pre-construction interest).
However, if your home loan is eligible for Section 80EEA deduction, you can claim an additional INR 1.5 lakh deduction. Section 80EEA is covered in more detail later in this article.
Deduction on principal repayment
Section 80C allows a deduction for the principal portion of the EMI paid for the year. The total amount that can be claimed is INR 1.5 Lakh.
However, to claim this deduction, the house must not be sold within five years of possession. Otherwise, the previous deduction will be added back to your income in the year of sale.
Deduction for stamp duty and registration charges
In addition to the deduction for principal repayment, a deduction for stamp duty and registration charges can be claimed under Section 80C, but only up to INR 1.5 lakh.
However, it can only be claimed in the year the expenses are incurred.
Additional deduction under Section 80EE
Home buyers are eligible for an additional deduction of up to INR 50,000 under Section 80EE. The following conditions must be met to claim this deduction:
The loan amount should be INR 35 lakh or less, and the property value should not exceed INR 50 lakh.
The loan must have been approved between April 1, 2016, and March 31, 2017.
And as of the loan approval date, the individual does not own any other homes, indicating that they are a first-time home buyer.
Section 80EE was reintroduced, but it only applies to loans approved before March 31, 2017.
Additional deduction under Section 80EEA
Budget 2019 has included an additional deduction under Section 80EEA for homebuyers of up to INR 1,50,000 to promote the housing sector.
The following conditions must be met to claim this deduction:
- The property’s stamp value does not exceed INR 45 Lakh.
- The loan must have been approved between April 1, 2019, and March 31, 2022. (extended from 31 March 2021)
- The individual does not own any other house on the date of loan sanction, indicating that they are a first-time home buyer.
- If the individual claims deduction under this section, they should not be eligible to claim deduction under Section 80EE.
Deduction for a joint mortgage - If the loan is taken jointly, each loan holder can deduct home loan interest up to INR 2 lakh and principal repayment up to INR 1.5 lakh under Section 80C in their tax returns.
To be eligible for this deduction, they must also be co-owners of the property lent. As a result, taking out a loan with your family can help you claim a more significant tax benefit.
Conclusion
Investing in real estate offers the maximum tax benefits. To know more about home loans and other terms associated with them, feel free to reach out to the Address India. Our Home Loan Consulting team will help you with everything possible.