Home Loan Tax Benefits

Learn more about Income Tax Rebate on Home Loan

Housing loans are one of the most-commonly acquired forms of credit in India, allowing millions of people to buy their dream properties. Are you planning to opt for a home loan in the near future?

Apart from considering the obvious factors, such as interest rate and tenure, you should also keep an eye on tax deductions from your home loan repayments.

How much can you save on yearly tax liabilities?

Well, the short answer is that it depends. It depends on several factors, such as your age, taxable income, principal repayment and interest amount for the assessment year. Additional factors can also come into play.

For instance, individuals assessing their taxes under the older regime are qualified for different tax rebates for home loan repayment in comparison to new tax regime assessees.

Are you still confused about your home loan tax benefits? This guide is here to help!

Income Tax Benefits on Home Loans

The Income Tax Act, 1961 offers various provisions for a tax rebate on home loans. The following are the three major areas where such a borrower can claim exemptions:

Principal repayment of home loans can net annual tax deductions of up to Rs.1.5 lakh under Section 80C of the ITA.
On the interest payments for a home loan, you can claim tax deductions of up to Rs.2 lakh, as per Section 24 of the Income Tax Act.
If you are a first-time homeowner, additional tax deductions of up to Rs.50000 are also up for grabs under the provisions of Section 80EE. This deduction takes place on the loan’s interest payments.

Keep in mind that tax deductions are calculated only on your taxable income and not your net earnings.

For instance, under the older regime of income taxes, individuals earning more than Rs.2.5 lakh a year are liable to bear taxes.

Now consider that your yearly income is Rs.4 lakh. In that case, home loan benefits will be applicable on your taxable income of Rs.1.5 lakh (Rs.4 lakh-Rs.2.5 lakh) only and not your entire yearly earnings.

Different Sections and Conditions for Home Loan Tax Benefits

The above-listed provisions offer a glimpse into the significant savings that one can claim on their income tax liabilities.

Nevertheless, you should also understand the various terms and conditions, along with the applicable Sections, under which such savings are applicable:

1. Section 80C (Deduction on Home Loan Principal Repayment)

Taxpayers can claim this benefit only once, with maximum deduction limited to Rs.1.5 lakh in a particular financial year.

However, besides the principal repayment sum, this particular benefit calculation also considers associated costs of buying the concerned property, such as stamp duty and registration charges.

2. Section 24 (Deduction on Home Loan Interest Payments)

You can claim maximum deductions of up to Rs.2 lakh on your income tax liabilities, based on home loan interest payments.

However, to claim this, the property in question must complete its construction within 5 years. Failure to do so will reduce savings potential to just Rs.30000 for taxpayers.

3. Section 80EE (Tax Deduction on Home Loan Interest For First-time Property Buyers)

This section only applies to you if you have no other property to your name. Other conditions that must be met to claim this additional benefit are:

The home loan principal amount should not exceed Rs.35 lakh.
The property should not be valued at more than Rs.50 lakh.

Apart from these provisions, you can also seek tax deductions under Section 80EEA in case of affordable housing.

Under this, taxpayers can claim an additional Rs.1.5 lakh tax savings on home loan interest payment, besides the interest-related rebates offered under Section 24. You can keep claiming this benefit until full repayment of home loan.

Additional conditions to consider here is that most of these tax exemptions are only applicable after the construction of a property is complete. If you are buying a ready-to-move property instead, these benefits will start from the get-go.

Moreover, if you decide to sell the concerned property within 5 years of acquisition, your claimed tax benefits till that point are considered void. These will be added to your taxable income during the next assessment.

As you can see, income tax rebate on home loans can lead to massive savings for an individual.

But, what happens in case of a joint home loan? Which of the borrower is liable to claim income tax deductions in such cases?

How does a Joint Home Loan Reduce Tax Liabilities?

If you decide to opt for a home loan with a co-borrower, who also happens to be a co-owner, tax-savings potential is essentially doubled. Under Sections 80C and 24, both the borrowers are eligible for up to Rs.2 lakh tax rebate on interest payment each and up to Rs.1.5 lakh benefit on the principal repayment each.

Therefore, each of the borrowers can claim up to Rs.3.5 lakh as annual income tax benefit on a home loan.

Differences in Home Loan Tax Deductions under Old and New Regimes

The Union Budget 2020 introduced a proposed tax regime, which lowers existing tax slab rates. Additionally, this new regime eliminates many of the exemptions and tax-saving provisions found in the existing taxation method.

Home loan borrowers deciding to shift to this new regime should know what to expect when it comes to deductions based on loan repayment.

The new tax regime proposes that taxpayers servicing the home loan for a self-occupied property can no longer claim income tax benefit on interest payment, under Section 24 of the ITA. Thus, such a rule reduces your tax-saving potential by up to Rs.2 lakh.

However, tax rebate on home loan interest would still be applicable for individuals who rent out the property in question. These people can still avail benefits in the following manner:

The standard deduction is applicable at 30% of net rental income. You can arrive at your net rental income by considering your total rental income from the property minus the applicable municipal taxes.
Once the standard deduction is calculated, individuals can claim home loan tax benefits on the interest liabilities, as per Section 24b of the Income Tax Act.

However, shifting to this new system of tax assessment is optional.

You can choose to follow the tax benefits under the older regime to take advantage of home loan tax exemptions, along with several other provisions.

What is a Home Loan Tax Benefit Calculator?

A home loan tax benefit calculator is a specialised online tool, which can help you assess your tax deductions while repaying such loans.

Even after acquiring knowledge regarding various tax-saving opportunities, it can be difficult for taxpayers to assess exact deductions. Doing so can also involve lengthy and complex calculations.

A tax benefit calculator, on the other hand, provides the results instantaneously. You can use it to determine the exact tax liabilities before and after the home loan benefits are accounted for.

How do you use such a calculator tool?

Factors Responsible for Home Loan Tax Deduction Calculation

The tax benefit calculator figures out your income tax dues by considering certain details, which you must provide.

Generally, such a tool will ask for the following pieces of information from assessees.

Year of Assessment - This is the year for which you are trying to determine your income tax dues
Category - An assessee’s category can be male, female, senior citizen or super senior citizen. Keep in mind that senior citizens and super senior citizens adhere to a different tax slab than individuals aged lower than 60 years.
Annual Earnings - The amount of money you earn in a year is one of the most important considerations for the determination of tax liabilities. Regardless of whether you choose to assess taxes under the old regime or shift to the new form of assessment, an income of up to Rs.2.5 lakh a year remains tax-free. Only income exceeding this amount is taxed as per applicable rates.
Amount of Interest Paid - Next, you would need to fill out the total interest payable on your home loan during the assessment year. This information is useful for calculating your deductions based on Section 24.
Amount of Principal Repayment - Similarly, in the next field, you will need to enter the total amount of home loan principal you repaid during the assessment period. This information is necessary for calculating your tax benefits under Section 80C.

Once you enter all of these details on the calculator, it will display three major pieces of information.

Firstly, it will reveal the amount of tax payable, without factoring in the home loan benefits.

Secondly, taxpayers would come to know about their liabilities after considering the several tax-saving provisions for housing loan borrowers.

Lastly, a different section will elaborate on the amount of tax you save because of your home loan repayment.

Benefits of Using a Housing Loan Tax Benefit Calculator

Now that you have a proper understanding of such a calculator’s functionalities consider why you must utilise the same.

Calculations Are Fast - An individual would need to indulge in lengthy manual calculations to arrive at his tax deductions from home loan repayment. This is time-consuming and challenging for most people. With a tax benefit calculator at their disposal, taxpayers can understand their liabilities better. Moreover, they can assess the amount they end up saving on tax payments due to their existing home loan dues.
Results Are Always Accurate - One mistake in these calculations can leave your tax payment plans compromised. When the time comes to clear your dues, you may find larger liabilities than what you assumed earlier. Thus, to prevent such issues from cropping up, you can utilise a home loan tax benefit calculator. With it, any chances of errors or mistakes are eliminated, leaving you with an understanding of the real tax liabilities after applying the tax rebates as applicable.
An Easy to Comprehend Interface - Using such a calculator is extremely simple, thanks to a streamlined interface. Even people who have never previously used such an online tool will be comfortable when using it for the first time. Thus, such a calculator ensures minimal complications for an assessee, enabling him to check liabilities.

These are some of the salient reasons to consider using this calculator tool before filing your taxes.

Remember that the assessment of tax liabilities involves several other deductions and exemptions, apart from housing loan benefits.

Even though this calculator can determine savings based on your home loan terms, it cannot quantify additional tax-savings through avenues.

A home loan not only helps you acquire the property you desire but also reduces income tax payments.

Nevertheless, as a borrower, you must check the exact tax rebate on home loan depending on your eligibility principal repayment and interest dues.

FAQs about Home Loan Tax Benefits

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What are the applicable tax benefits on a home loan for an under-construction property?

Tax benefit on principal repayment of a home loan for an under-construction property is the same as for a ready-to-move property. Therefore, you can claim, up to Rs.1.5 lakh under Section 80C, in these cases.

However, the tax deduction of up to Rs.2 lakh on interest payment is unavailable for claim before the construction is complete.

The deduction, in this instance, is accumulated for a maximum of five years until project completion. Homeowners can claim it through five-yearly instalments from the year of home completion.

What are the tax-saving options for borrowers availing a home improvement loan?

If you avail a loan to improve your house, the interest payments for such a loan qualify for tax deductions, under Section 24. Each year, a borrower can claim deductions of up to Rs.30000 based on his interest liabilities.

However, keep in mind that such loans do not lower your tax dues based on the loan principal repayment.

Are you eligible for tax rebates on a home top-up loan?

Borrowers who acquire a top-up loan on their housing loan to repair or renovate their property are eligible to claim tax benefits under Section 24. They can realise annual tax deductions of up to Rs.30000.

However, if you utilise the principal amount to purchase or construct a home, the tax benefits of Rs.1.5 lakh and Rs.2 lakh are available on the loan’s principal repayment and interest payment portions, respectively.

How is your tax rebate calculated for home loans on second property?

Individuals can claim the same tax benefits on their second home loan as that of the first loan if one of these homes is self-occupied and the other is vacant.

In case of a let-out property, on the other hand, borrowers can claim a standard deduction of 30% on the total interest payments. There is no upper limit on such benefits.

What happens to home loan tax-savings on interest payments in case the property is sold within 5 years of acquisition?

If you happen to sell the property in question within five years of purchase, the deducted taxes based on interest payments are added to your taxable income.

Therefore, assessees surrender all benefits on their home loans under Section 24 when they decide to sell the owned property.