A Walkthrough on Home Loan Interest Tax Benefit For The First Time Buyers

Is a shortage of funds stopping you from following your long-time dream? You can choose to become a homeowner today and apply for a home loan. Let’s see how.

A home is not just a roof over your head and four walls protecting you from undesired elements. A home incorporates longings and dreams. Do you desire it too?

High real estate property costs make it hard for many to buy their dream home, but a home loan is easy as it sponsors up to 80% of the property price. A housing loan is a loan given to a person to buy a house.

The property is mortgaged to a bank or non-bank financial organisation until the loan gets repaid. The lender will have title to the home until the home loan payment gets refunded in full along with interest due on time.

A housing loan can be taken out for the purchase of real estate and the construction or renovation of a house. A home loan interest tax benefit is another way to encourage citizens to take advantage of tax deductions for buying a property.

Section 80C: Home loan tax benefit (Principal Amount)

The amount paid as a principal refund of a home loan by an individual/HUF is qualified as a tax deduction under Section 80C of the Income Tax Act. The max tax deduction permitted under Section 80C is Rs. 1,50,000.

This tax deduction under home loan interest tax benefit is the aggregate of the deduction allowed under section 80C, and the amount infused in the PPF account-saving fixed deposits, national savings certificate, equity-oriented mutual funds, senior citizens savings scheme etc.

The tax deduction under Section 80C is available on a payment basis irrespective of the year for which the payment is made. The amount spent as stamp duty and the registration fee also comes under a tax deduction under section 80C, even if the assessee has not taken the loan.

However, the tax benefit of the housing loan, according to Section 80C for repayment of the principal, is allowed after construction and the approval issues are completed. Under this section, no deduction for principal repayment for years during which the house was under construction would be allowed.

Furthermore, if you are planning to purchase an under-construction property as its cost is lower than that of an entirely completed property, note that GST is also applicable on the under-construction property. However, GST is not levied on properties whose construction is complete.

House should not be sold within five years

Section 80C(5) also says that if the assessee transfers the property on which he had declared tax deduction under Section 80C before the expiry of 5 years from the end of the financial period in which he received the custody, then no transfer is allowed under Section 80C deduction and tax benefits for housing loans.

The full amount of the already proclaimed home loan interest tax benefit for previous years is the assessee’s income in the year the property was sold, and the assessee is needed to pay tax on this payment.

Section 24: Tax relief on earnings from interest on a loan for the purchase/construction of real estate

The home loan interest tax benefit for paying interest is permitted as a deduction under Section 24 of the Income Tax Act.

According to Section 24, the income from the house’s property will be reduced by the interest paid on the loan if the loan was drawn for the property’s purchase/renovation/reconstruction/construction/repair.

The ultimate tax deduction allowed under Section 24 in respect of self-occupied property is subject to a top limit of Rs. 2 Lakhs (Advanced from Rs. 1.5 Lakhs to Rs. 2 Lakhs in Budget 2014).

Note: In case the owner of the house himself does not occupy the property due to his work, business, or occupation carried on elsewhere, he has to live at another place which does not belong to him, then the part of tax deduction allowed under Section 24 will be Rs. 2 Lakhs only.

It is also essential to note that this Section 24 tax benefit is deductible on a liability basis, i.e. on an accrual basis. Hence, deduction under Section 24 can be declared on an annual basis even if no payment has been made during the year as compared to Section 80C, which allows relief only on a payment basis.

Moreover, if the property is not purchased/constructed or completed within 5 years from the end of the financial year in which the loan was taken- the interest benefit would reduce from Rs.2 lakhs to just Rs.30 thousand (Limit raised from 3 years to 5 years from FY 2016-17 onwards).

Deduction from principal repayment

The principal part of EMI paid for a given year is qualified as a home loan interest tax benefit under section 80C. The highest amount that can get claimed is up to Rs.1.5 lakh.

To claim this deduction, the property should not get sold within five years of occupancy. Otherwise, the previously claimed deduction will get added back to your income in the year of sale.

Section 80 EEA: Tax relief for home loan interest income (First-time buyer)

This deduction under Section 80 EEA would be applicable only in the following cases:-

This deduction would get authorised if the stamp duty value of the property acquired is less than Rs. 45 lakhs. The loan should be approved between April 1, 2019, and March 31, 2022.

The above sections relating to home loan interest tax benefits are summarised as follows:-

Particulars Quantum of Deduction (Rs.)
Detached property, Section 24 2,00,000
Properties that are not used separately Without limits
Section 80C 1,50,000
Section 80EE 1,50,000

Note:-

The above tax deductions apply to the individual, not the property. So if you purchased the property jointly and took a joint home loan, each person paying the amount would be allowed to pay the entire deduction separately.

If you live in a rented room and are getting HRA Allowance tax benefit, you can even claim tax benefit on a housing loan under Section 24, Section 80EHP & Section 80C.

If a person opts for the latest slab rates of home loan interest tax benefit as notified in Budget 2020, he will not be able to claim the benefit of any of these deductions.

Additional deduction under Section 80EE

Additional deduction under Section 80EE allows home buyers a home loan interest tax benefit up to a maximum of Rs 50,000. It is essential to meet the following conditions to claim the deduction:

  • The loan amount should be Rs 35 lakh or less, and the property value should not surpass Rs 50 lakh.
  • The loan must get approved between April 1, 2016, and March 31, 2017.
  • And on the loan approval date, the individual does not own any other house, i.e. the house’s original owner.

Section 80EE has been reintroduced but is only applicable to loans approved up to 31 March 2017.

Advantages of a taking home loan

A place to call home; in addition to the feeling of achievement that comes with paying off your home loan on time, it also offers you a place of your own where you can live in harmony and protect your loved ones.

Home loan interest tax benefit

To motivate more and more people to buy their own homes, the Indian government offers tax deductions on principal and interest spent on home loans.

A person is entitled to a deduction of up to Rs 1.5 lakh under Section 80C of the Indian Income Tax Act, 1971, in an accounting year. While under Section 24B of the Indian Income Tax Act, a deduction of up to Rs.2 lakh is allowed on the interest portion.

Deduction of income tax is after the completion of the house’s construction. You cannot claim income tax credits as long as the property is under construction.

Improved credit score

Paying your EMIs on time enhances your credit rating and boosts your home loan eligibility for a second property(if you ever buy one). Thus, a good home loan prepayment history lets you get education loans, medical loans, etc.

Low-interest rates

Home loans have maturities for an extended period and are offered with fixed and variable interest rates. In variable home loan interest rates, you will presumably get help from a plunge in investment returns at some point in the cycle.

Appreciating asset

Real estate is an appreciating investment, and a home equity loan permits you to buy a property today that will appreciate hereafter. As India is a young country where more and more people are constantly aiming to buy homes, residential real estate will persist as a promising investment.

Stay feasible

If you own liquid funds with you, it is right and smart to save or invest them. Life is unexpected and, in a way, upsets our goals. If you end up using all your current funds to buy a house in one payment, you may encounter a liquidity crunch in the future. Home loans permit you to remain liquid, while in the form of home loan EMIs, you only pay a share of your income.

Rent relief

If you presently live in a rental, you know the sufferings. If you are not somebody who needs to change cities often, buying a house with a home loan application can be an excellent choice. It gives you the independence to design your space and live as you please, and you can also build enough area for your children to have their private room.

Refinancing tool

In the case of housing finance, you can transfer your loan to another lender if they offer you a lower return on investment. If you’re unhappy with your home loan returns or your financial institution has inferior customer service, you can refinance your loan with a new lender offering lower home loan interest rates and more appropriate customer support.

Property due diligence by lending institutions

Lending organisations approves a home loan only after checking your home loan application, legal background, documents, and assets. It is useful to you as it decreases the risk of financial repercussions. After all, an authorised project is more protected than an unapproved one.

Long repayment tenure

Home loans are the only loans that let you pay back up to 30 years. So you can facilitate the burden on your EMIs by expanding your tenure. Use an easy online tool like a home loan EMI calculator to know how your EMI will vary with a difference in the period.

Conclusion

Buying your own house is nothing less than a dream come true. The Government of India has always shown great interest in encouraging residents to invest in buying homes, and it is why the home loan is qualified for tax deduction under Section 80C. And when you buy a home on a home loan, it comes with several tax advantages that significantly decrease your tax expenditures.

To claim the above home loan interest tax benefit, you must present a statement provided by the lender that says the amount due and paid for interest and principal. After using the above home loan tax benefit deductions, the individual’s residual income would get taxed at income tax rates.

FAQs

What are the home loan interest tax benefits?

The home loan borrower can take advantage of the tax deduction from the principal repayment according to Sec 80C, tax deduction from the interest according to Section 24 (b) and other tax benefits from housing loan interest for new home buyers under Section 80EE.

How to claim a deduction from a home loan interest tax benefit?

Estimate the tax deduction you want to declare. Make sure the house is in your name, or you are a loan co-borrower. Advance the home loan interest receipt to your employer to accommodate the tax credit at the source.

Can you deduct interest from a home loan on a self-occupied property?

According to section 24 of the Income Tax Act, a home loan deduction can be used to pay an interest tax benefit.

What are the tax benefits of a home loan under section 80EEA?

The available deduction under section 80 EEA provides income tax benefits up to Rs.1.5 Lakh paid on home loan interest.

Who can claim the home loan interest tax benefit?

The proprietor of the property can claim a tax benefit. Your spouse is a co-borrower and can also claim a tax deduction.