How do you save tax with a home loan?

Save tax with a home loan

Are you aware that your home loan can be one of your biggest tax-saving tools? If you are paying EMIs for your dream home, you are not only securing a roof over your head but also unlocking tax benefits that can dramatically reduce your financial burden.

But how exactly can you leverage your home loan to save taxes in India? Let’s break it down for you. Read on!

Home loan tax benefits in India

First thing first, secure a home loan if you haven’t already. In India, you have many options like IDBI home loans, or you can even approach NBFCs. Platforms like Credit Dharma make it easier to compare available home loan options and make informed decisions.

Once you have secured a home loan, keep in mind that the Indian Income Tax Act offers various deductions on not just the principal but also the interest components of a home loan under different sections. Here’s what you need to know.

Section 80C – Tax benefit on principal repayment

Under Section 80C, the principal amount you repay on your home loan qualifies for tax deduction. Per financial year, the maximum deduction allowed is ₹1.5 lakh.

Please note that this deduction applies only to let-out and self-occupied properties. Also, if you are claiming this deduction, you cannot sell the property within five years of possession. If sold, the deduction claimed will be added back to your taxable income in the year of sale.

That’s not all! Under Section 80C, you can also claim payments towards registration fees and stamp duty. The overall limit is ₹1.5 lakh.

Section 24(b) – Tax benefit on interest payment

As mentioned, deduction is not just allowed on the principal but also on the interest payment. For self-occupied properties, the maximum deduction allowed is ₹2 lakh per financial year.

Please note that this deduction is allowed only if you have acquired or constructed the home within five years from the end of the financial year in which you secured the home loan.

If you meet eligibility conditions, the interest deduction is applicable to resale and new properties.

Section 80EEA – Additional deduction for affordable housing

Under Section 80EEA, an additional tax deduction of ₹1.5 lakh is available if your home loan was sanctioned between 1st April 2019 and 31st March 2022. This deduction is over and above the deduction under Section 24(b).

For claiming this deduction, ensure your property qualifies as affordable housing, and you have not paid more than ₹45 lakhs in stamp duty.

Please note that this tax deduction benefit is only available to individuals who do not own any other residential property at the time of sanctioning the loan.

Section 80EEA – Additional deduction for first-time homebuyers

Are you a first-time homebuyer? You can claim an additional deduction of ₹50,000 per financial year. To claim this deduction, your loan must be sanctioned between 1st April 2016 and 31st March 2017. Also, your loan amount must not be more than ₹35 lakh, and the entire value of your property must be within ₹50 lakh.

The amount deducted under Section 80EEA is over and above the limit under Section 24(b).

Additional steps to maximize tax savings with your home loan

Not only are there tax deductions under the Indian Income Tax Act, but there are also steps you can take to maximize your savings. Take a look.

Secure a joint home loan

Taking a joint home loan with your parents, spouse, or siblings means that both of you can separately claim deductions.

As co-borrowers, each of you can claim up to ₹2 lakh on the interest paid under Section 24(b) and ₹1.5 lakh on the principal amount under Section 80C. This effectively doubles your tax benefits.

Please note that to be eligible for tax deductions, all co-borrowers must also be co-owners of the property.

Purchase an affordable home

Check the eligibility criteria for the affordable housing schemes in India. If your home qualifies for any of these schemes, you can claim a deduction of ₹1.5 lakh under Section 80EEA, and this deduction will be over and above the standard limit under Section 24(b).

Start early and plan the loan tenure wisely

If you opt for a longer home loan tenure, you will be paying a high interest rate during the initial months, and this will increase your deductions under Section 24(b).

If you are planning to keep the property long-term, you can leverage tax benefits by structuring the loan. Moreover, early planning will allow you to effectively allocate funds without financial burden.

Let out the property

Do you have multiple properties? If so, you can think of renting them out. Then, the entire interest paid can be claimed as a deduction.

However, please note that rental income is taxable. So, you must evaluate your net financial impact before making a decision.

Things you must keep in mind

New versus old tax regime – The deductions mentioned above are not applicable to the new tax regime introduced in Budget 2020. If you do not want to lose these home loan tax benefits, opt for the old tax regime instead of the new one.
Loan eligibility – For deductions, only loans that have been taken from banks or registered financial institutions are eligible.
Documentation – Without proper documentation, you cannot claim deductions on your home loan. So, keep records of your interest certificates, loan agreements, and tax receipts.
Property completion – Deductions under Sections 80C and 24(b) are only available after you have taken possession of the property.
Property taxes and transfers – If you sell the property within five years, the tax benefits you receive will be reversed. You must properly plan to sell the property so that it does not become a burden.
Second home tax benefits – If you are the owner of multiple homes, only one will be considered as self-occupied.The others will be taxed according to notional rental income.

Summing up

Home loans in India are not only meant to purchase property but are also powerful tax-saving tools. Plan your loan smartly and reduce your taxable income while achieving your dream of homeownership.