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Tax Benefits on Home Loans

Last Update Date : April 27, 2019
Estimated Read Time: 6 min

home loan tax benefits

Most people in life want to have the keys to their dream home one day. In case someone misses out to get a home of their choice in their 20’s at least they have an option to do it in their 30’s or at a later stage before it’s too late. As they say – “Home is the starting place of hope and dreams.”

One of my friends had acquired House property worth Rs 55 lakh in the outskirts of Bangalore by opting a loan from one of the Banks. But he does not know the Income Tax Benefits you can avail from a home loan. This guide will educate you on how best you can take advantage of the tax benefits with your home loan.

House Property – Introduction

Today we have number of options to becoming proud owners of a beautiful home and there are many banks who offer loans to purchase the right home to make your dreams into a reality. The major attractions of home loans lie in the kind of tax benefits it gives to the individual. Almost up to 85% of the amount of the total cost of house property can be issued as a loan. The tax payer must remember to claim the extra exemptions or additional benefits in case they qualify as per the rules of the Income Tax Department (ITD).

Home Loan Tax Exemption – Rules

As per Budget 2018, owners of properties that are rented can deduct interest up to Rs 2 lakh per annum after adjusting the rent earned on the housing loan.  The amount above Rs 2 lakh can be carried forward for subsequent eight assessment years.

Individuals who have occupied the same house property and have taken a home loan are entitled for Rs 2 lakh deduction on interest paid on the home loan.

In case the property is sold within 3 years of purchase, an individual will have to pay the tax as per the slab rate because the profit earned on sale is considered as Capital Gains.

In case the property is not completed or acquired within 5 years from the end of the financial year in which the loan was taken, an individual can avail of the interest benefit of up to Rs 30,000.

Tax Benefits of Home Loan

A very important factor to be considered while taking a home loan is the tax benefit it offers to an individual. The tax benefit is governed by different sections which are claimed as deductions against relevant sections of Income Tax Act
Tax benefit on Principal amount u/s 80C – An Individual or a HUF (Hindu undivided family) can avail tax benefits on the principal repayment of the home loan.

  • Stamp duty and registration charges are also eligible for deductions.
  • Life Insurance Premium, NSCs, EPF, ELSS can be claimed along with the home loan, and an overall deduction of Rs. 1 lakh in a year.
  • And the point to note is that commercial property and home renovations or additions on existing property is not eligible u/s 80C of Income Tax Act.
  • An individual is expected to take loan from banks, Central & State governments, LIC, Public Company or a Public-Sector Undertaking etc

The tax benefit on home loan u/s 80C is allowed after the completion of construction of the house and the Completion Certificate is issued to the individual. GST would be applicable in case someone wants to buy an under-construction property due to the prices being low but there is no Service Tax on fully completed properties.

Interest payment under Section 24(b) – As per this section an individual can avail a tax deduction on interest payable on a loan taken to buy or construct a house.

  • An individual can also claim this benefit for repairs or reconstruction of an existing property.
  • Processing fees and prepayment charges will also be treated as interest payment.
  • This benefit is available for residential and commercial properties as well.
  • Owners of let-out properties can claim full interest payment, but the exemption for self-occupied properties is restricted to Rs. 1.50 lakhs per annum.
  • The loans taken from friends and family can also be included to get tax benefits

Here is the table below for the reference.
Deduction allowed for Payment of Interest on Home Loan as per Section 24

Property TypeSelf-Occupied PropertyNot Self-Occupied Property
Completion StatusCompleted within 5 yearsNot completed within 5 yearsCompleted within 5 yearsNot completed within 5 years
Deduction AllowedRs. 2,00,000Rs. 30,000Rs 2,00,000Rs 3,00,000

Tax Exemptions for First Time Buyer

First time buyers can avail the tax benefits for both the principal and interest paid on home loan. Under Section 80C, the principal amount can be declared and of course there are also other investments like PPF, LIC, Children’s tuition fees in the same section and these shouldn’t exceed 1.5 lakhs.
Towards the interest payment, a deduction of up to RS 2 lakhs is allowed on home loan u/s 24(b) of the Act. Furthermore, a first time buyer can claim a tax deduction additionally up to 50,000 for interest paid u/s 80EE of the Income Tax Act.

Tax Benefits on Second Home Loan

An individual can get tax benefits on a second home loan on availing mortgage for construction or purchase of the 2nd house. Here out of the two properties, one is considered as self-occupied and the other a let-out property.

Joint Owners of Home Loan – Tax Benefits

Joint owners are those who are also the co-borrowers along with owners of a self-occupied property, who can get tax deductions on home loan interest up to Rs 2 lakhs. And for each of the joint owners, towards the principal repayment, which includes stamp duty along with registration charges, can get an exemption of up to Rs. 1,50,000.

In case one of the co-owners is not making payments, then the one who is paying the interest and principal can get the complete tax benefits.

How to claim Tax Benefits on Home Loans

  1. Here are the points below to claim the tax deduction on home loan.
  2. Calculate the tax deduction to be claimed
  3. You should be the owner of the property or co-borrower
  4. Home Loan Interest Certificate needs to be submitted to your employer for making relevant changes to Tax Deducted at Source.
  5. Otherwise, you can file the return by declaring the details by yourself
  6. For self-employed, ensure the documents are saved for any future reference or to provide as proofs to the Income Tax Department.

For an easy understanding, here is the comparison of Home Loan and its benefits as per Section 24 and Section 80C for reference.

ParticularsUnder Section 24Under Section 80C
Tax Deduction applied forInterestPrincipal
Type of PropertyAny Real Estate PropertyOnly Residential House Property
Basis of Tax DeductionAccrual basisPaid basis
Tax Deduction Allowed to the IndividualSelf-Occupied Property: Rs. 2,00,000. Non- Self Occupied Property: No LimitRs. 1,50,000
Loan PurposeConstruction/ Purchase or Repair/ Reconstruction or Renewal of a Residential House Property. Construction or Purchase of a new House Property
Tax Deduction EligibilityPurchase/ Construction should be completed within 5 yearsNil
Sale of Property RestrictionNilIn case property is sold within 5 years, Tax Deduction claimed would be reversed

Frequently Asked Questions

  1. Who is eligible to claim tax benefits on home loans?

The owner of the property/joint owners can claim the tax benefits of a home loan

2. What are the tax benefits of a house property which is under construction?

Until the construction is complete and a certificate is issued for same, no tax benefits can be claimed by the owner. After completion, the interest paid for the under-construction period can be claim in 5 equal installments from the year in which the construction is complete.

3. Can I get tax benefits, if I plan on constructing a house and selling in few years?

In case the sale happens in less than 5 years, the tax benefits availed till date will be taken back except the tax deduction on the interest on home loan.

The key points are that the owner can claim a tax deduction of up to Rs 1,50,000 u/s 80C towards the principal repayment of home loan per annum. And up to RS 2 lakhs can be exempted u/s 24 towards the interest on home loan. And in case the property value is less than 50 lakhs and its first-time buyer, then an individual can claim income tax benefit up to 50,000 u/s 80EE for the interest paid on home loan.

Careful planning ensures, a tax payer reaps the tax benefits from Home Loans. The experts at H&R Block India can assist you in maximizing your tax planning/saving when filing your income tax returns

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CA Chetan Shinde
Chetan is the Lead Tax Advisor at H&R Block (India) with an experience of almost half a decade in audit and taxation. His professional areas of interest are GST advisory and statutory audit. Apart from taxation, he is passionate about social causes and works extensively towards rural school development and literacy.

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