Home Loan Tax Benefits - How to save Tax through Home Loan?
A Home Loan is a convenient source of finance to fulfil your dream of owning a house. The Indian government provides a way to fulfil this dream by encouraging citizens to invest in a house property. It offers various benefits on the repayment of a Home Loan through tax deductions under the Income Tax Act 1961. Here is understanding these benefits better:
What comprises a Home Loan?
There are two components in a Home Loan repayment: the principal amount and the interest paid on the loan amount. You can avail of tax benefits on both these components under Section 80C, and 24(b) of the Income Tax Act, 1961.
Tax deduction on interest paid
Under Section 24(b), you can claim a deduction from your gross income on the interest amount paid on your Home Loan. For a self-occupied home, you can claim the deduction of the interest amount up to Rs 2 Lakh. Similar is the case with if your property is given out on rent. However, 80C deduction not for commercial properties. You can claim this deduction on an accrual basis, i.e., availing the deduction on an annual basis even if you have not paid the interest amount in that year, but have paid in excess in the previous year. You can carry forward loss not for self- occupied properties. for commercial, it can be carried forward for 8 years.
Tax deductions on the principal amount
Under Section 80C of the Income Tax Act 1961, you can claim a deduction on the repayment of the principal amount. This deduction includes the charges you pay for registration and stamp duty on your home. You can avail of a deduction up to a value of Rs 1.5 Lakh under this section. This can be claimed along with other tax-saving instruments like Fixed Deposits, Provident Fund, Insurance premium, etc. from your taxable income. However, an important restriction on this tax benefit is that you cannot sell the house within five years of getting the possession. If you do so, the tax benefit will be added in your taxable income in the year you sell the house property.
How to utilize the available deductions to the fullest?
In case, both you and your partner are working then it is advisable to go for a joint Home Loan. A joint Home Loan not only enhances the loan eligibility, but also increases the combined tax benefits. Under this, the both partners can jointly claim deductions worth Rs 3 Lakh on the principal amount under Section 80C. Moreover, the total tax deduction on the interest repayment under Section 24 of your Home Loan goes up to Rs 4 Lakh from Rs 2 Lakh.
Read more about Smart ways couples can save on income tax.
Tax deduction for first-time buyers
As a first-time buyer, you can avail of a deduction on your interest amount over and above the Rs 2 Lakh cap available to you under Section 24. You can claim this deduction under Section 80 EE of Income Tax Act 1961 if you are purchasing your first residential house property. This deduction is available up to a limit of Rs 50,000 in a financial year until your loan is repaid. However, this deduction is only available for loans taken up to 31st Mar 2017.
However, to avail this deduction, you should fulfil the following criteria:
- The value of your house should be Rs 50 Lakh or less
- The loan amount should be Rs 35 Lakh or less
- On the date of sanction, you should have no other house owned by you
- The loan should be sanctioned by a financial institution or a housing finance company
Although availing a Home Loan brings with it a financial cost of EMIs, it has its own benefits. Firstly, it helps you improve your credit score when you pay your EMIs timely over the years. Secondly, it can also help you reduce your tax liability by offering various tax benefits. You can smartly use your Home Loan to fulfil your aspirations of owning your own home. You can do so by opting for the best Home Loan deals and by looking into the various benefits with reputed lenders. Moreover, you can also save a lot of taxes on its repayment by efficiently using the tax deductions available to you.
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* The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. You are recommended to obtain specific professional advice from before you take any/refrain from any action. Tax benefits are subject to changes in tax laws. Please contact your tax consultant for an exact calculation of your tax liabilities.