Tax Benefits on Home Loans

Buying a home is the dream of every person. However, with the rates for property being what they are, such a purchase is impossible without taking a home loan. We have discussed the best ways to negotiate a Home Loan elsewhere on this site, and also mentioned that while debt should, in general, be avoided as much as possible, a Home Loan is a form of debt that is not only inevitable, but also can make financial sense.

Home Loan

The main reason for this is the tax benefit that the Government offers for those who take Home loans. We will discuss these in detail below.

Exemption under section 80C

Section 80C of the Income Tax Act prescribes Exemptions that allow a tax-payer to reduce his taxable income by availing of them. One of the items included in this is ‘Repayment of Home Loans’. Any amount paid towards repayment of the principal amount of a home loan (not interest) is eligible for exemption under this section upto the overall limit of Rs. 150,000/- (This is along with other exemptions. For example, if you already have invested Rs. 50,000 in Life insurance premia, and paid Rs, 150,000 towards Home loan principal repayment, you will get only Rs 150,000 as a tax exemption, not Rs. 200,000).

Other things to be kept in mind:

  1. If Home loan is in the name of senior citizen, exemption upto Rs. 200,000 is available
  2. Only applies for purchase or construction of residential property (not commercial).
  3. Only available for self-occupied property.
  4. If the principal is repaid as pre-payment over and above EMI, the exemption is still available.

Deduction upto Rs 200,000 under section 24

Section 24 of the Income Tax Act provides for exemption upto Rs. 200,000 for Interest paid on Home Loan. This is over and above Section 80C.

  1. Exemption increases to Rs. 300,000 for senior citizens
  2. If the loan sanctioned is upto Rs 35 lakhs and value of the house is upto Rs 50 lakhs, additional benefit of Rs. 50,000 as deduction will be allowed in the current financial year (2016-17)
  3. Only available for residential properties

 Deduction of entire interest paid as Loss from House Property

For Property that is held on rent or vacant, a person can claim the entire amount of Interest on home loan as a loss from House Property. For this, the rental income is shown as profit, and the amount of Interest paid on home loan is the expense. At least in the initial years after acquiring the house, the interest will exceed the income and you will be able to claim it as a loss from house property. This will reduce your taxable income to that extent. However, for vacant property also, the notional rent as defined by the Income Tax Act will have to be shown before this benefit can be claimed.

  1.  In case the loss is more than your total income, you can carry forward the balance for upto 8 years
  2.  In case of multiple properties, always claim the one with highest notional rental value as self-occupied and maximize the loss against the other one
  3.  This benefit is available for all sorts of property including commercial and open land
  4. If a property is not occupied due to the owner being in another location for employment or business, the benefit will be limited to Rs 200,000 unless the same is actually placed on rent.

Taking a Home loan may be a matter of necessity but it also provides benefits in the form of tax benefits. Ensure you claim them when you file your tax returns and you can have your house and save money at the same time!

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