Get Deduction up to ₹3.5 Lakhs and Reduce Home Loan Tax Liability – Here’s How

Buying or building your own dream house is perhaps one of the biggest financial goals you may have on your wishlist. Fortunately, with housing loans available at affordable interest rates today, it is easier now than ever before to achieve this goal. But did you know that with the help of a housing loan, you can not only fulfil this target but also save tax in the process?

There are several home loan tax benefits that you can get after you apply for a home loan and start repaying it. In case you have already taken out a loan for the purchase or construction of your house, you need to know what these tax benefits are right away, so you can use them to reduce your tax burden.

In fact, you can get a deduction of up to ₹3.5 Lakhs with this kind of a loan. Want to know more about these home loan tax benefits? Let’s take a closer look at what they are.

Home Loan Tax Benefits u/s 80C of the Income Tax Act, 1961

Each EMI you pay for your home loan has two components — one that goes towards repaying the principal and the other that goes towards repaying the interest on the loan. Under section 80C of the Income Tax Act, you get tax relief on the principal component of your home loan EMIs. The maximum amount of deduction you can claim is limited to ₹1.5 Lakhs.

So, for example, say that the principal component of your home loan EMIs during a financial year comes out to be ₹1.8 Lakhs. Here, you can claim a maximum deduction of ₹1.5 Lakhs under section 80C. On the other hand, if the principal component of your home loan EMIs during a financial year is ₹80,000, the maximum amount of deduction you can claim u/s 80C is limited to the amount actually paid, which is ₹80,000.

To avail this tax benefit, you need to ensure that you do not sell the property within 5 years of possessing it.

Home Loan Tax Benefits u/s 24 of the Income Tax Act, 1961

As mentioned earlier, when you apply for a home loan, you pay both principal and interest each year. You’ve seen the tax benefits on the principal component. Section 24 of the Income Tax Act gives you relief on the interest component of your home loan EMIs. Here, the maximum amount of deduction that you can claim depends on the nature of the house property, as explained below.

In Case of a Self-Occupied House Property

If the house property for which you wish to apply for a home loan is occupied by yourself and your family, you can claim a maximum amount of ₹2 Lakhs as deduction for the interest component of the EMIs.

In Case of a Let Out House Property

If the house property for which you have taken the home loan is rented out, there is no limit on the interest amount that you can claim as a deduction. In other words, you can claim the entire interest component of your home repaid during the year as a deduction.

For instance, say you repay ₹2.8 Lakhs during the financial year as interest on your home loan. In this case, here is how much you can claim as a tax deduction based on the type of house property:

If the house property is self-occupied: ₹2 Lakhs only

If the house property is let out: ₹2.8 Lakhs

Total Deductions You Can Avail on a Home Loan

From the details given above, we can sum up the deductions available under the Income Tax Act, 1961, as follows.

Deduction on the principal component u/s 80C: Up to ₹1.5 Lakhs

Deduction on the interest component u/s 80C: Up to ₹2 Lakhs for a self-occupied property (or unlimited for a let out property)

In other words, you get deductions worth ₹3.5 Lakhs at the very least. Furthermore, there are a couple of other provisions that you can take advantage of too.

Additional Tax Benefits on Home Loans

Sections 80EE and 80EEA also offer tax benefits on the interest component of the home loan as follows. Both these sections are mutually exclusive, so you can only claim your deduction under one of these two sections. However, you can claim benefits under both section 80C and section 24 in addition to section 80EE or 80EEA.

Home Loan Tax Benefits u/s 80EE of the Income Tax Act, 1961

Under this section, you can avail tax benefits up to ₹50,000 on the interest component of your EMIs if you fulfil the following conditions:

You are a first-time home buyer

Your home loan was sanctioned between 1st April 2016 to 31st March 2017

The amount of home loan does not exceed ₹35 Lakhs

The value of the property does not exceed ₹50 Lakhs

Home Loan Tax Benefits u/s 80EEA of the Income Tax Act, 1961

Section 80 EEA gives you tax relief on your home loan interest repayment up to ₹1.5 Lakhs, provided you fulfil these conditions.

You are a first-time home buyer

Your home loan was sanctioned by a financial institution or a housing finance company between 1 April 2019 to 31 March 2022.

The stamp duty value of the property does not exceed ₹45 Lakhs.

Conclusion

This sums up all the home loan tax benefits available in the Income Tax Act, 1961. Remember that the benefits under sections 80EE and 80EEA are only available for loans sanctioned within a specific period. So, if you want to apply for a home loan now, these benefits will not be available to you. However, the deductions under sections 80C and 24 will be, so you can reduce your tax burden significantly by claiming those tax benefits. A deduction of ₹1.5 Lakhs for the principal component and ₹2 Lakhs for the interest component can reduce your taxable income by ₹3.5 Lakhs overall. 

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