For most people, owning a home is a dream come true. The Government of India has traditionally favoured encouraging residents to invest in real estate. This is why a home loan qualifies for a Section 80C tax deduction. And when you buy a house with a home loan, you get a slew of tax perks that help you save money on your taxes.
The Income Tax Act of 1961 allows for a tax deduction for home loan repayment. Interest on a home loan paid up to Rs 2 lakh per year is tax deductible under section 24. Every year, up to Rs 1.5 lakh can be deducted from principle repayments under section 80C. Sections 80EE and 80EEA allow for additional deductions.
Who are eligible for the tax deduction?
A person who buys a new house for resale or to rent out can claim a home loan tax exemption under sections 80C and 80EEA of the Income Tax Act 1961. If you are a co-owner or a co-borrower, you can also claim tax benefits.
Max tax amount deductible for a home loan
- Up to Rs 1.5 lakh u/s 80C
- Up to Rs 1.5 lakh u/s 80EEA for first-time buyers
- Up to Rs 2 Lakh u/s 24 for a self-occupied house; no limit for the non-self-occupied house.
Interest on a home loan is deductible
For the purchase or building of a home, a home loan is required. If the loan is for the construction of a residence, it must be finished within five years of the end of the financial year in which the loan was obtained. Interest payment and Principal repayment are two parts of your EMI for a home loan.
Section 24 allows you to deduct the interesting part of your EMI paid for the year from your total income up to a maximum of Rs 2 lakh.
The maximum deduction for interest paid on self-occupied dwelling property is Rs 2 lakh from the assessment year 2018-19 onwards.
Interest paid on a home loan during the pre-construction period is deductible.
Let's understand this!
- Assume you purchased a property that is still under construction and has not yet moved in.
- You, on the other hand, are paying the EMIs.
- In this situation, your ability to deduct interest on a home loan begins only after construction is completed, or immediately if you purchase a completely constructed property.
So, does this mean you won't get any tax benefits on interest paid between the loan taken and the completion of the construction work?
Pre-construction interest, as defined by the Income Tax Act, is a type of interest that can be deducted. Over and above the deduction you are otherwise able to claim from your house property income, you may take a deduction in five equal instalments beginning the year the property is acquired or construction is finished. The highest amount of money that can be borrowed is still Rs 2 lakh.
Tax deduction on principal repayment
Section 80C allows you to deduct the principal portion of your EMI payments for the year. The amount that can be claimed is limited to Rs 1.5 lakh.
Note - The house property must not be sold within five years of possession in order to claim this deduction. Otherwise, the earlier deduction will be deducted from your income in the year of sale.
Stamp duty and registration fee
In addition, Stamp duty and registration fees are also deductible under section 80C but only up to Rs 1.5 lakh in total.
Note - It can only be claimed in the year in which the expenses were incurred.