How to Use Home Loans Smartly for Tax Benefit Purposes – Useful Guide

Many of you apply for a home loan while buying your dream house. We can see that the home loan comes with multiple tax benefits, which can reduce your yearly income tax significantly. So, it is always advised, even if you have enough ready capital it is better to buy a house with a home loan. In this write-up, the different ways by which the home loan can be smartly used for tax benefits will be discussed.

Deduction for interest paid

The EMI which you pay for the home loan has two components, the interest payment, and the principal repayment. The interest component which you pay in your EMI can be claimed as a deduction from your total income of that financial year up to a maximum value of Rs200000 under section 24B. But there are some conditions to avail this benefit. The first condition is the house should not be sold within 5 years of its possession. This deduction can only be claimed in a completed house. If your house or apartment is still under construction, you won’t be able to avail this benefit in your income tax.

If the property is not self-occupied then there is no maximum limit on the tax deduction for the interest paid on the loan. In this case, the entire amount of the interest paid can be claimed as a deduction.

Deduction on Principal Repayment

The principal portion of the EMI of your home loan, which is paid for that financial year, can also be claimed as a deduction under section 80C up to a maximum value of Rs 150000. But, the precondition to claim this benefit is the house property should not be sold within 5 years of possession. If you sell the house after claiming the deduction, then the benefit will be added back to your yearly income in the year selling the house. This benefit is given only when the construction of the house is complete and the completion certificate is awarded.

Deduction for First Time Home Buyers

If you are a first-time house buyer then you can claim some extra benefits in your income tax. Under section 80EE of income tax act, the first time home buyers are allowed a special deduction of maximum Rs 50000 from the annual income. This section 80EE was first introduced in India in the financial year 2013-14. Then, this deduction was not effective in 2015-16. Finally, section 80EE was reintroduced in 2016-17. There are two conditions to claim this benefit. Firstly, the home loan amount should be Rs 3500000 or less than that. Secondly, the value of the new house should not exceed Rs 5000000. It should be noted that at the time of sanction of the loan the owner should not have any other house in his name.

Deduction for Stamp Duty and Registration charges

There is also a deduction for the stamp duty and registration charges under section 80C. This deduction can only be claimed in the year of registration of the house. The maximum limit for this deduction is Rs 150000. This benefit is given to all the people who buy a new house, irrespective of whether they have taken a home loan or not.

Deduction for Joint Home Loan

If the home loan is jointly taken by two persons, then each of them can claim a deduction on their annual income under the section 80C. A deduction of Rs 200000 on the home loan interest and an additional sum of Rs 150000 on the repayment of the principal are allowed. This benefit can be claimed by each one of them on their individual tax return. They should also be the joint owner of the property. So, it can be seen that if the house is jointly owned by the family members, then they can claim larger tax benefit.

The above write-up was in brief, a few ways by which an individual can use his home loan for tax benefits