Buying a home is one of the most significant financial decisions most people make in their lifetime. Along with the emotional satisfaction of owning a home, it often comes with the responsibility of managing a home loan. However, there’s good news for homeowners in the form of tax benefits that can make this financial commitment a bit lighter. Learn how to claim house Loan Tax Rebate under income Tax.
This post explains house loan tax rebates under the Income Tax Act. It also shows how you can benefit from them, with examples of potential savings.
What is House Loan Tax Rebate?
House loan tax rebate refers to the deductions you can claim on the interest and principal repayments made on your home loan. The government has introduced these rebates to encourage home ownership and make it financially easier for individuals to own a home.
The tax rebates come under two major sections of the Income Tax Act:
- Section 80C (Principal Repayment)
- Section 24(b) (Interest on Home Loan)
1. Section 80C – Deduction on Principal Repayment
Under Section 80C of the Income Tax Act, individuals can claim a deduction on the principal repayment of their home loan.
- Maximum Deduction: You can claim a deduction of up to ₹1.5 lakh per financial year on the principal repayment.
- Eligibility: This deduction is available to individuals and Hindu Undivided Families (HUFs) who have taken a home loan.
- Conditions: The property must be self-occupied or the loan must be for purchasing or constructing a house. Additionally, the amount must be paid during the financial year for the deduction to apply.
Example:
Let’s say you have taken a home loan and paid ₹1.2 lakh towards the principal in the financial year. You can claim the full ₹1.2 lakh as a deduction under Section 80C. However, if you paid ₹2 lakh, the maximum deduction allowed is ₹1.5 lakh, so you can only claim ₹1.5 lakh.
2. Section 24(b) – Deduction on Interest Paid on Home Loan
The interest component of your home loan repayment also offers substantial tax benefits under Section 24(b).
- Maximum Deduction for Self-Occupied Property: You can claim up to ₹2 lakh per year as a deduction on the interest paid on your home loan for a self-occupied property.
- Maximum Deduction for Let-Out Property: If the property is let out, there is no cap on the amount of interest deduction. You can claim the entire interest paid as a deduction, subject to certain conditions.
- Eligibility: The loan must be for the purchase or construction of a residential property.
Example:
If you paid ₹1.8 lakh as interest on your home loan for a self-occupied property, you can claim a full deduction of ₹1.8 lakh under Section 24(b), as it is within the ₹2 lakh limit.
However, if the interest paid was ₹2.5 lakh, you can only claim ₹2 lakh, the maximum allowed for self-occupied properties.
For a let-out property, suppose you paid ₹3 lakh in interest. Since there’s no cap on interest deductions for rental properties, you can claim the full ₹3 lakh as a deduction.
3. Additional Benefits for First-Time Homebuyers
If you are a first-time homebuyer, you can also avail of additional deductions under Section 80EE and Section 80EEA.
- Section 80EE allows first-time buyers to claim a deduction of up to ₹50,000 on the interest paid on home loans, provided the loan amount is less than ₹35 lakh and the property value is less than ₹50 lakh.
- Section 80EEA provides an additional deduction of up to ₹1.5 lakh on interest payments for first-time homebuyers who meet specific conditions, including the loan being sanctioned between April 1, 2019, and March 31, 2022.
Example:
Let’s say you are a first-time homebuyer who has taken a loan of ₹25 lakh to purchase a home valued at ₹45 lakh. You paid ₹1 lakh as interest during the financial year.
- Section 80EE: Since the loan is below ₹35 lakh and the property value is below ₹50 lakh, you can claim an additional deduction of ₹50,000 on the interest under Section 80EE.
- Section 80EEA: If you purchased the property in the specified time frame, you can also claim an additional ₹1.5 lakh under Section 80EEA.
This means you could potentially claim ₹2.5 lakh (₹1 lakh under Section 24(b), ₹50,000 under Section 80EE, and ₹1.5 lakh under Section 80EEA) on your interest payments.
Key Points to Keep in Mind
- Self-Occupied Property vs. Let-Out Property: The tax benefits differ depending on whether the property is self-occupied or rented out. If the property is rented, there’s no limit on the amount of interest deduction you can claim.
- Joint Home Loan: In case of a joint home loan, both co-borrowers can claim the tax benefits individually. The tax deduction for the principal repayment (up to ₹1.5 lakh) and interest (up to ₹2 lakh) can be split between the co-borrowers, depending on the loan agreement.
- No Deduction Without Payment: You can only claim deductions for amounts that have actually been paid during the financial year.
Is Deduction Applicable Under New Income Tax Regime?
The new income tax regime, introduced in 2020, offers lower tax rates. However, it eliminates most deductions, including house loan tax rebates.
If you choose the new regime, you cannot claim deductions under Section 80C (principal repayment) or Section 24(b) (interest on home loan). These deductions are available in the old regime.
However, if you choose the old tax regime, you can continue to claim these deductions.
How to Choose Between the Old and New Tax Regimes
Example:
- If you earn ₹10 lakh in a year:
- Old Regime: You can claim deductions on your home loan (principal and interest) and reduce your taxable income.
- New Regime: You will pay taxes according to the reduced tax slabs but will not be able to claim deductions like the home loan tax rebate.
So, if the home loan tax benefits are significant for you, you might want to consider sticking with the old tax regime.
Conclusion
House loan tax rebates are a great way to reduce your tax burden while investing in a home. By understanding and utilizing the tax deductions available under Sections 80C, 24(b), and others, you can make your home loan more affordable in the long term.
With the above examples, you can see how these deductions can directly impact your tax savings. Always ensure you have the necessary documentation and fulfill the required conditions to claim these deductions. If you’re planning to take a home loan, make sure to consult with a tax expert to fully understand the benefits you can claim and how they apply to your situation.
Disclaimer: This article is for informational purposes only. Please consult a tax professional or financial advisor for advice tailored to your specific situation.