Homeownership is a dream for most people, but the task of paying for the home loan and taxes is a challenge. Fortunately, home loan tax benefit provisions help in this regard by allowing deductions on the principal amount as well as the interest. If well optimised, these can lead to huge tax exemptions every year. However, for one to fully exploit these advantages, they should have some understanding of the provisions under the Income Tax Act.
Understanding Home Loan Tax Benefits
There are provisions under the Income Tax Act regarding home loan repayment under different sections for both the principal and the interest. These benefits can be enjoyed to the fullest, and the taxable income reduced to the barest minimum through proper structuring of the loan, as well as the term and repayment schedule. Some borrowers fail to optimise their deductions, either because they are not aware of the possibility or because they lack documentation. It is, therefore, necessary that one should plan for the financial aspect so they can save more money each year and also avoid instances where they waste a lot of money.
Claiming Deductions on Principal Repayment
The most popular tax advantage of a home loan is the tax exemption on the principal amount as per Section 80C. This section enables borrowers to avail an exemption of up to ₹1.5 lakh in a financial year in case the property is not sold within five years from the date of purchase. If the property is sold before this period, all the deductions made under Section 80C will be deemed to be added to the income of the year of sale.
Since Section 80C also covers PPF, NSC, ELSS, life insurance premiums, and other saving schemes, the borrowers should ensure that the home loan repayment should not exceed ₹1.5 lakh. Those who have already taken advantage of this limit in other investments may not be allowed to take advantage of this again.
Maximising Interest Deductions on Home Loans
Section 24(b) also permits taxpayers to deduct the amount of interest on the home loans they have taken. It allows an amount of up to ₹2 lakh per year for self-occupied property, and there is no restriction on the let-out property. However, the loss under “Income from House Property” is allowed to be set off up to ₹2 lakh only, and any excess loss can be carried forward for eight years.
To fully maximise this benefit, borrowers should maintain records of interest certificates given by the lender as a way of ensuring that they are updated. If the property is under construction, the interest paid during this phase is allowed as a deduction in any of the five years after the possession of the property. Using a home loan tax benefit calculator can help borrowers estimate their potential savings and optimise deductions accordingly.
Benefits of a Joint Home Loan
A joint home loan is the best way to claim maximum tax deductions because, in most cases, both partners are working. If two people take a joint loan and the property is taken as security for the loan, both are owners of the property and can claim:
- ₹1.5 lakh on principal repayment under Section 80C
- ₹2 lakh on interest repayment under Section 24(b)
This actually doubles the tax-saving advantages, where a couple can claim up to ₹6 lakh in deductions per financial year. For this reason, both borrowers should be involved in the repayment of the loan, and there should be clear ownership. Making EMI payments through a joint account strengthens the claim for tax deductions.
Another factor that should be taken into consideration while determining the amount of loan that a borrower can borrow from a financial institution is the tenor of the loan and the EMI. Some borrowers prefer to avoid high EMI amounts to enable them to afford the monthly instalments, but this is not the best from the tax standpoint. Since the home loan interest tax deduction is relatively higher in the initial years, it is better for the borrowers to select a higher EMI in the initial years to avail the maximum tax benefits.
It is always better to make partial prepayments as much as possible to reduce the overall interest outgo, but at the same time, the annual interest claimed should not exceed ₹2 lakh. Borrowers should, therefore, take time and go through their loan amortisation schedule to look for tax optimisation opportunities while ensuring that the total cost of borrowing is not too high.
Additional Tax Benefits for First-Time Home Buyers
For first-time home buyers, Section 80EE offers an additional tax deduction of ₹50,000 per year over and above the deductions available under Sections 80C and 24(b). However, this is done with some conditions as follows:
- The home loan should have been availed of between 1st April 2016 and 31st March 2017.
- The loan limit should not be more than ₹35 lakh, and the value of the property should not exceed ₹50 lakh.
- The buyer should not have any other residential property at the time of approval of the loan.
This remains a valid proposition until the loan is fully paid up, which means long-term tax exemptions for borrowers who qualify for the loan. If you are eligible for this benefit, you should include it in your tax planning to reduce your taxable income even more. Using a home loan tax benefit calculator will help you determine the impact of these deductions on your taxable income.
The Importance of Proper Documentation
For claiming home loan tax benefit, it is essential to maintain proper records of finances. Some of the documents that taxpayers should ensure they have include:
- Original receipts from the lender for the repayment of the loan and the interest charged.
- Documents indicating the details of the co-borrower in the case of joint loans.
- Proof of EMI payments to ensure that the borrower claiming the tax deduction has actually made the payments.
This is because there may be a problem in claiming the right amount of tax deductions or problems when filing income tax returns.
How to Get the Most Out of Your Home Loan Tax Deductions
It is, therefore, necessary to look at the various tax deductions that are available to get the best out of home loan tax benefit provisions. Borrowers should ensure that they borrow in such a way that they can offset as many expenses as possible while keeping the cost of repaying the loan as low as possible.
For those who are planning to take a home loan in the near future, the tenure, interest rate, and method of repayment are some of the most important factors that can help in saving the most. Home loan interest tax deduction is one of the extra advantages of home loans, but it should not be the only criterion.
Final Thoughts
A home loan is one of the biggest financial responsibilities, but the tax benefits associated with it help borrowers handle the costs. Section 80C, Section 24(b), and Section 80EE allow homeowners to claim deductions while remaining financially sound.
By doing so, borrowers can fully benefit from these advantages in loan repayments, documentation, and joint home loans, where applicable. It is also necessary to stay updated with current tax laws and seek the help of a tax consultant whenever needed to maximise savings and ensure they can afford home loan payments.
To any home loan seeker or homeowner, it is useful to understand the tax deductions that can be claimed so as to reduce the taxable income and increase cash inflows in the future. A home loan tax benefit calculator can be used to determine total deductions and plan the finances in the best possible way.
