Do Home Loans Help You Save On Income Tax?

Owning a home is a dream for many. An average Indian saves a better part of their income for the down payment of their dream home and then spend a good part of their remaining life paying off the loan.

For most Indians, buying a home is a huge financial decision and it often requires monetary support in the form of housing loans. Which brings us to the question of the hour – Are housing loans going to help in any way other than with buying the house? The answer surprisingly is a yes.

Tax Benefits From Home Loan For Your First House

Home loans on the first home you purchase in your name comes with many benefits. And no, it is not just exemptions you can claim while filing tax.

So, for all of you considering getting a home loan to purchase that dream home of yours, here are some benefits of home loans which help you manage your cash flow better. As tax benefits are the title focus of this article, we’re hoping that we’ll be able to shed some light on how you get tax benefits when you obtain a home loan.

Section 80C says that when you purchase your first home, if the price of the house is less than INR 40 lakhs and the loan amount is no less than INR 25 lakhs, a deduction of upto 1.5 lakh can be claimed over the next two financial years, either spread out over these two years or in any one year.  

As per amendments in the recent years, an owner can claim a deduction of upto 2 lakhs if they occupy the house for which the loan was taken out on.

However, your deduction will be only INR 30K if any of the following is not true

  • The loan was taken for construction or purchase of a brand new house
  • Construction or purchase of said new home was completed within three years of the loan being sanctioned.
  • The loan was taken after April, 1999.

How To Claim Tax Benefits On Housing Loan

Claiming the deduction while the construction happens is not possible. In the time between the loan being issued and the construction being finished, the deduction can only be claimed on the interest you pay for the housing loan in five equal installments.

The deduction to claim principal repayment, an amount of upto INR 1.5 lakhs is available. You can verify your principal repayment amount with your bank or EMI history. However, keep in mind that you can claim the deduction only if the house is new or constructed from scratch and if it is not sold for the next 5 years after taking possession.

Tax Benefits For Joint Homeowners

Joint homeowners too get tax benefits if they co-occupy the home for which the loan was taken. Each homeowner can claim upto INR 2,00,000/- each on deduction on interest. And upto INR 1,50,000/- on principal repayment under Section 80C.

Keep in mind that even if the loan was claimed jointly, you won’t get to claim the benefits unless you are also co-owner of the property. Eg, if a loan was taken by a husband-wife duo and the house is only in the wife’s name, the husband would not get any tax benefits at all. In simple terms, you have to be a co-owner and a co-borrower to enjoy tax benefits.

Can Both HRA And Deduction Be Claimed On Tax Benefits?

If your employer supplies you with HRA component in your salary, then yes, you can enjoy both! This is all the more applicable if you have a home purchased on a loan and you stay in a different property that is rented out. HRA can be claimed for the rented property and deduction of upto 2,00,000/- on the interest and not the principal repayment.

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Summary Of Tax Benefits From Housing Loans

To put things in perspective and for easy understanding, here’s a summary of all the benefits you can claim against your housing loan.

1) Deduction on interest: When you pay EMIs to finish off your loan, the interest component of the EMI will qualify as a valid deduction. Again, this applies if the loan and the property both have your name on it. I.e. you are both borrower and owner of the house.

2) Deduction on principal repayment: EMIs paid towards repaying principal can be claimed as deduction under Section 80C of the Income Tax Act. As mentioned before, only a maximum of INR 1.5 lakhs can be claimed.

3) Stamp Duty And Registration: In the year that stamp duty and registration was paid, they can be claimed as valid deductions under Section 80C. This can be claimed ONLY in the financial year that the payments were made.

4) Pre-Construction Interest: You can start claiming deduction on interest paid during pre-construction period starting with the year the construction began. To do this, you’ll need to calculate the sum total of interest paid, divide that into 5 installments and claim them. As in, you claim them in 5 equal installments.

Go Get Your Dream House!

With so many benefits on housing loans, it is best that you avoid purchasing a house without a loan. Yes, it could mean that the next several years of your life will be spent repaying it, but at least unlike renting, you’ll still have an asset in your name by the end of the repayment.

Owning a house is a dream for many! And with so many government policies in place to help people achieve that, this seems like a good time to start looking for houses. The RERA act is expected to come into full force soon, so investing in real estate may be a good idea now. You can read more about RERA and its impact in India on our blog.

Good luck, dear reader. We hope the next time you visit our blog, it would be from your new home. Cheers!

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About the Author: Nithyakala MKS

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