Tax Benefit on Home Loan under Various Sections of the Income Tax Act

Buying a home is one of the most special moments in a person’s life. It is a long-term investment that needs careful consideration. Buying a house on a home loan has several tax benefits that one should be aware of. The government encourages investment in houses and offers many tax benefits on home loans under Section 24, Section 80C Section 80EE, and Section 80EEA. If you are planning to avail a home loan for your dream house, you should surely understand the tax benefits that each section offers. 

It is important to note that tax deductions for house properties cannot be allowed before the construction of the property. If a loan is taken for repair, reconstruction, renovation of a property tax dedication cannot be claimed. Tax deductions can only be claimed if the home loan is taken for the construction or purchase of a property.

What is a Pre-construction Interest?

When you take a home loan for the construction of a property, you can claim a pre-construction interest. The pre-construction period starts at the date of borrowing the home loan or commencement of construction of house property. The amount of pre-construction interest that can be claimed should not exceed 2 lakhs, in a financial year. The tax deduction is allowed in 5 equal installments starting from the year in which you have purchased the house or after completion of construction of the property.

The repayment of Home Loans can be done in two ways, principal repayment, and interest repayment. Since the repayment is done by two different components, they are governed by different sections of the Income Tax Act. Section 80 governs repayment of principal amount and Section 24 governs repayment of the interest. If you are a first-time home buyer Section 80EE and Section 80EEA offer additional tax benefits for you.

Section 80C

  • Under Section 80C of the Income Tax Act,1961 maximum tax deduction of Rs 1,50,000 is allowed as repayment of principal amount on Home Loan by a HUF/Individual.
  • This tax deduction is allowed for various investments such as National Savings Certificate, PPF Account, Tax Saving Fixed Deposits, Equity Oriented Mutual funds, Senior Citizens Saving Scheme, etc.
  • This involves stamp duty and registration charges as well which can be claimed only once. An important point to note under this section is that tax deduction is applicable only after the construction is completed and required certificates are submitted.
  • Section 80C(5) states that in case the owner decides to sell the property within 5 years he does not get any tax benefits andThe aggregate amount claimed in the previous years is considered as income and the assessee is liable to pay tax on the same.

Section 24

  • Under Section 24 of the Income Tax Act, 1961 maximum tax deduction of Rs. 2,00,000 is allowed as repayment of interest on a Home loan by HUF/Individual.
  • The interest paid as EMI for the year can be claimed as a deduction from your total income.
  • A tax deduction is deductible on a payable basis i.e. on an accrual basis. Deductions can be claimed every year even if no payment has been made that year.
  • For non-self-occupied properties, no maximum limit has been prescribed and the taxpayer can claim the whole interest amount.
  • The assessee is eligible to claim tax deduction only if the construction is completed within 5 years.
  • House Property should not be sold within 5 years of possession u/s 80c.
  • If the property is not constructed within 5 years, the interest benefits reduce from 2 lakhs to Rs. 30,000 only.

Section 80EE

  • Under Section 80EE of the Income Tax Act, 1961 maximum tax deduction of Rs 50,000 is allowed as repayment of interest for first-time home buyers.
  • This amount can be claimed beyond the tax benefits provided by Section 24 and 80C.
  • The value of the house purchased should be Rs 50 lakhs or less and the home loan availed should be Rs 35 lakhs or less.
  • The home loan must be sanctioned between 1st April 2016 to 31st March 2017 to avail of tax benefits provided by this section.

Section 80EEA

  • The introduction of Section 80EEA in 2019, was undertaken to meet the objectives of the “Housing for all” program.
  • It extends the benefits provided by Section 80EE for FY 2019-2020.
  • Similar to Section 80EE, this section is also applicable only to first-time home buyers.
  • The taxpayer should not own any other house property on the date of sanction of the home loan.
  • A maximum tax deduction of Rs 1,50,000 is allowed as repayment of interest if you meet the criteria provided under Section 80EEA.
  • This amount is over and beyond the tax benefits provided by Section 24 and 80C. Hence, a total tax benefit of Rs 3,50,000 can be availed as repayment of interest on home loans.
  • The value of the house property should be Rs 45 lakhs or less.

Tax Benefits for Joint Owners

Tax benefits on joint home loans can be claimed by joint owners, provided certain criteria are met. Ownership of the property is a prerequisite; hence they must be co-owners of the property. Secondly, they must be co-borrowers of the home loan. Lastly, the construction of the property must be complete. For properties under construction, tax benefits are not available.

In several cases, you may be a co-borrower of the home loan but not a co-owner of the property. In such cases, tax benefits cannot be claimed by both co-borrowers.

For self-occupied properties, each co-owner who is also a co-borrower of the home loan can claim Rs 2,00,000 in his income tax returns.

You need to furnish statements mentioning all the required details stating the amount payable and the amount paid as principal and interest amounts. Based on your statement tax deductions can be claimed. After claiming the tax deductions, the amount of tax left to be paid is as per the balance income of an individual as per the Income Tax Slab Rates.