A Guide to Home Loan Tax Benefit

Applying for a home loan is an excellent way to get the desired funds for buying the house and reduce your annual tax liability. Read on to know more about the tax benefits on a home loan.

Applying for a home loan to purchase your dream home is a big financial decision. Since home loans are a long-term financial product, you must bear the responsibility of repayment for a longer duration. As such, it is paramount that you plan your finances well. You must not only make sufficient arrangements of funds to manage the EMI repayments, but you must also take advantage of the various tax benefits associated with home loans.

The Indian Tax laws allow various tax benefits on home loans under different sections of the Indian Income Tax Act. Let us look at some of the deductions you can avail of and reduce your tax liability in a financial year.

Tax benefit on home loan interest repayment

A home loan can be available for purchasing a new home or constructing your house on the land you own. Irrespective of the purpose of availing the loan, the repayment amount essentially involves two components – the principal amount and the interest component.

The interest amount that you repay is eligible for tax benefit under Section 24 of the Indian Income Tax Act to a maximum limit of Rs. 2 lakhs in a financial year.

If you have availed of a home loan to construct a home, you can claim the tax benefit only from the year in which the construction is completed.

Tax benefit on repayment of home loan principal amount

The principal portion of the home loan EMI you pay in a financial year is eligible for tax benefit under Section 80C of the IT Act. The maximum amount you can claim as a deduction is Rs. 1.5 lakhs. However, to claim this benefit, you must not sell the property for at least five years from the date of registration. If you sell the property within five years, the deduction that you may have claimed earlier will be reversed and added back as gains from the property’s sale, and it will be taxed as per the regular tax bracket.

Tax benefit on payment of stamp duty and registration fee

When you purchase a home, you must mandatorily pay certain statutory charges like stamp duty and registration fee. The government levies these charges, and it is an indispensable part of the home buying process. So, when you draft your home loan application, you must factor in these charges to determine the overall loan cost.

Apart from the tax benefit on the principal’s repayment and the interest amount, you can also claim a deduction on the stamp duty and registration fees under Section 80C. However, it can be claimed only in the year of registration.

Additional tax benefit

Under Section 80EE of the IT Act, you can avail of an additional deduction of Rs. 50,000 in a financial year. But, to claim this deduction, you must meet certain requirements, including:

  • The loan amount must not be more than Rs. 35 lakhs
  • The value of the property that you wish to buy must not be more than Rs. 50 lakhs
  • The loan must be sanctioned between April 1, 2016, to March 31, 2017.

When the Finance Minister of India presented the Budget in 2019, a new tax benefit was introduced for home buyers under Section 80EEA. Under this section, you are eligible to get an additional deduction up to a maximum limit of Rs. 1.5 lakhs in a financial year over and above the benefits granted under Section 24 and Section 80C of the IT Act.

However, to be eligible for this tax benefit, the loan must be sanctioned between April 1, 2019, to March 31, 2020. Also, as on the sanction date, you must not own any other permanent house in any part of India. Lastly, if you availed additional deduction under Section 80EE, you cannot claim this deduction.

David Curry

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