The Government provides several tax benefits to attract individuals to buy a house with the help of home loans tax benefit. These lucrative incentives such as deductions in income tax liability enhance the borrower to go for home loans.

A home loan has two components principal amount and the interest on home loan. Several sections under the Income Tax Act, 1961 govern these components. The individual claims these deductions while filing for the ITR. Let’s take a look at these deductions associated with the home loan.

Tax benefit on Home loan – Section 80C

Section 80C of the Income Tax Act, 1961 provides a deduction for the amount of repayment of the principal amount of the home loan. The higher limit to claim this deduction is INR 1.5 Lacs.

Under this section, deductions are also claimed on investments in the Public Provident Fund, Equity-Oriented Mutual Funds, Senior Citizens Saving Scheme, Tax Saving Fixed Deposits, etc.

The amount paid on the registration fee and stamp duty can also be claimed as a tax deduction under the IT Act. The following points should be kept in mind:

  • The tax deduction can be claimed under this section – Only after the construction of the house is complete, and the completion certificate is obtained.
  • Qualified for actual payment basis
  • In the years in which property is under construction, there will be no deduction
  • No tax benefit and deduction can be claimed in case the property is sold within five years of such purchase or completion of construction.
  • And in the above situation, the amount will be collected and qualified for tax liability under this section and increase the taxable income.

Tax benefit – Section 80EE

In Budget 2016, this section allows for an additional deduction of INR 50, 000 for interest on home loan for first-time house buyers. It can be claimed if the value of the property is INR 50 Lacs only and the amount of home loan taken is less than INR 35 Lacs.

But the time period of the home loan should be from April 1st, 2016 to March 31st, 2017. It is allowed after the FY 2016-17. And also, till the time repayment of the loan is carried on, the deduction is available.

Tax Benefit on a home loan – Section 24

The repayment of interest can be claimed as a deduction under this section. The limit of this deduction is INR 2 Lacs on a self-occupied home under this section. This deduction was increased from INR 1.5 Lacs to INR 2 Lacs in the budget of 2014-15.

This deduction is claimed on an annual basis. And can be claimed even if there is no actual payment made. In case, the construction of the house on which home loan has been taken is not completed within five years then the interest benefit will be cut to INR 30,000 from INR 2 Lacs.

Also, if the house is not self-occupied, then the income from house property is calculated after reducing the payment of interest paid.

The individual will incur a loss from house property if the interest paid exceeds the amount of rent paid.

Pre-construction Interest

The borrowers may start paying their EMIs to the financial institutions even before the construction is completed. No deduction for payment of interest should not be sanctioned before completion of construction under the IT Act (Section 24).

No deduction can be claimed before completion of the purpose of the home loan. A claim can be made in five equal installments for five successive FY if the loan is taken for purchase or construction of a property, the interest is paid during the construction of the house. This duration starts from the year of construction to the year of completion.

Points to know about tax benefits on home loan

  • Interest paid on the outstanding amount – Not treated as a tax deduction
  • Loss under income from house property – to be set off against income from other heads in the same year
  • The loss can be carried forward to the next year in case there is an outstanding balance
  • No tax deduction to be claimed – for a commission paid for the arrangement of the home loan.
  • If home loan is taken for construction and it is completed within three years from the end of the financial year in which the loan is availed – Only the tax deduction will be available to the taxpayer.
  • No tax deduction or benefit is available to the successors of the taxpayer.