Availing a home loan for buying a house not only helps improving your liquidity quotient but also endows you with tax benefits and rebates that can reduce your overall tax liability.Below are the tax benefits you can claim when you avail a home loan:
Deduction on interest amount: Under Section 24 of the Income Tax Act, if you are paying equated monthly instalments (EMIs) for a home loan, the interest component in the EMI can be claimed as deduction. However, you must be both an owner and a co-borrower (in the loan) to claim tax benefits. This deduction can be claimed from the year in which the construction of the house is completed. Every year, a maximum of Rs 2 lakh can be claimed for deduction.
Deduction on principal repayment: The component of your EMI which goes towards payment of principal amount can also be claimed for deduction under Section 80C of the Income Tax Act. A maximum of Rs 1.5 lakh can be claimed as deduction under Section 80C.
Deduction on stamp duty and registration charges: Under Section 80C, you can also claim deduction for payment of stamp duty and registration charges. However, these can be claimed only in the year in which these were paid i.e. immediately after buying a property and getting it registered in your name.
In addition, the processing fee, service fees or any prepayment fees paid for getting a home loan sanctioned can also be claimed by the home buyer under Section 24 of the Income Tax Act.
Deduction on pre-construction interest: This tax benefit under Section 24 and Section 80C of the Income Tax Act is available only in the financial year (FY) in which the house is acquired or the construction gets completed. You cannot claim any deduction to this end for an under-construction property. However, you can claim the pre-construction interest by adding the entire amount and claiming it in five equal instalments. The total deduction, however, should not exceed Rs 2 lakh and the house must be self-occupied for claiming this tax benefit.
Deduction under Section 80EE: Section 80EE under the Income Tax Act is a relatively new section introduced in March 2013 to provide tax benefits to first-time home buyers, who have purchased a house worth Rs 40 lakh or less with a home loan of Rs 25 lakh or less.
The section was revised and re-introduced in March 2016 with an additional deduction of Rs 50,000 for interest on home loan. This incentive would be over and above the tax deduction of Rs 2,00,000 under Section 24 and Rs 1,50,000 under Section 80C. This Deduction of Section 80EE would be applicable only if:
The value of the property purchased is less than Rs 50 lakh and the value of loan taken is less than Rs 35 lakh
The loan is sanctioned between 1st April 2016 and 31st March 2017
The benefit of this deduction would be available until the time the repayment of the loan continues, from FY 2016-17 onward.
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The tax benefits listed above are per person and not per property. To explain further, in case of co-ownership of a property and joint home loans, each person repaying the amount is considered eligible for claiming the entire deduction separately.
Home buyers who are currently living in rented accommodations and claiming HRA benefits can also claim tax benefit on home loan under Section 24, Section 80EE & Section 80C.
How to claim tax benefits against your home loan?
For claiming the tax deductions listed above, the home loan borrower is required to present the statement provided by the lender or the home loan provider clearly specifying the amount payable and paid towards the interest and principal components. After claiming the above deductions, the balance income of the borrower is liable for taxation in accordance to the income tax slab rates.