Buying a home is one of the most significant financial commitments in an individual’s life. To ease this burden and encourage home ownership, the government provides various tax benefits on home loans under the Income Tax Act. These benefits can substantially reduce the tax liability of borrowers and make home loans more affordable in the long run.
However, understanding the full extent of these provisions, their applicable sections, eligibility criteria, and limitations is crucial to maximizing these advantages. This article provides a detailed breakdown of the tax benefits available on home loans, covering all relevant aspects without focusing on any specific lender or institution.
Before exploring the tax implications, it’s important to understand the two primary components of a home loan:
Different sections of the Income Tax Act provide deductions for these components, subject to certain conditions and caps.
Tax deduction on the repayment of the principal component of a home loan is available under Section 80C of the Income Tax Act. This benefit is available to individual taxpayers and Hindu Undivided Families (HUFs).
The maximum deduction allowed under Section 80C is ₹1.5 lakh per financial year. This limit is inclusive of other eligible investments and expenses under Section 80C, such as life insurance premiums, Employee Provident Fund (EPF), Public Provident Fund (PPF), and tuition fees for children.
Under Section 24(b) of the Income Tax Act, borrowers can claim a deduction of up to ₹2 lakh per annum on the interest paid on a home loan for a self-occupied property. If the property is not self-occupied (e.g., rented out), the entire interest paid can be claimed as a deduction, though there may be restrictions on setting off losses under the head "Income from House Property."
To further support first-time homebuyers, the government introduced Section 80EE, offering an additional deduction on interest payments:
To continue the benefits of Section 80EE for newer borrowers, Section 80EEA was introduced.
If a home loan is taken jointly, each co-borrower can claim tax deductions individually on both the principal repayment (Section 80C) and interest payments (Section 24b), provided they are also co-owners of the property.
This significantly increases the total tax savings for a family if the loan is taken jointly by spouses or family members.
When borrowers begin repaying their home loan before the construction of the house is completed, the payments are called pre-EMI interest. This interest is not eligible for deduction in the year it is paid. However, it can be claimed in five equal annual installments starting from the year of completion of construction, under Section 24(b).
To claim tax deductions on your home loan, you must ensure you have the following documents:
Taxpayers should retain these documents for record-keeping and for submission if required by tax authorities.