Overview of Home Loan Tax Benefits
When you pay off a home loan, your EMI actually splits into two components: the principal (the actual amount you borrowed) and the interest (what the bank charges you for borrowing that money).
The Income Tax Act treats these two components differently, allowing you to claim deductions under separate sections. Think of it as a double tax benefit. You can claim deductions on the interest you pay, the principal you repay, and even the registration fees you pay during the purchase.
Home Loan Interest Tax Deduction Under Section 22
Section 22 of the Income Tax Act, 2025 deals with the deduction you can claim on the interest paid towards your home loan. This is often the most-used provision among home loan borrowers, as the interest component is typically the larger part of EMI payments, especially in the earlier years of the loan tenure.
1. Eligibility Criteria
To claim the deduction under Section 22, you need to meet the following conditions:
- You must use the loan funds exclusively to buy, build, repair, or renovate a residential property.
- You must own or co-own the property.
- If the property is occupied by you, it must not be used for any commercial purpose.
- You must finish building or purchasing the property within 5 years from the end of the financial year in which you took the loan.
2. Deduction Limits Based on Property Type
The deduction limit under Section 22 varies depending on whether the property is self-occupied or let out. The table below summarises this clearly:
| Property Type |
Condition |
Maximum Deduction |
|---|
| Self-Occupied Property |
Loan taken on or after 1 April 1999; construction completed within 5 years |
Up to ₹2,00,000 per year |
| Self-Occupied Property |
Loan taken before 1 April 1999 or construction not completed within 5 years |
Up to ₹30,000 per year |
| Let-Out Property |
No cap on deduction |
Actual interest paid (full amount) |
It is important to note that in the case of a let-out property, there is no upper limit on the interest deduction. You can claim the entire interest paid during the year as a deduction against your rental income. However, if there is a loss under the head ‘Income from House Property’, it can only be set off against other income up to a maximum of ₹2,00,000 per year. The remaining loss can be carried forward for up to eight assessment years.
3. Interest Paid During Pre-Construction Period
What happens to the interest you pay while your house is still under construction? You do not lose it. You can accumulate all interest paid before construction ends and claim it in five equal annual instalments, starting in the year construction is finally completed. This is subject to the overall ₹2,00,000 cap for self-occupied homes.
Deduction on Principal Repayment Under Section 123
While Section 22 handles the interest, Section 123 takes care of the principal amount you pay back to the bank.
You can claim a deduction of up to ₹1,50,000 per year for principal repayments. This section also covers the money you spend on stamp duty and registration charges, but you can only claim those expenses in the year you actually pay them.
If you sell the house within 5 years of taking possession, it can lead to the reversal of your Section 123 principal deductions. The amount is added back to your income in the year of sale, and you’ll be taxed on it.
Additional Deduction Under Section 130
If you are a first-time homebuyer, the government offers an extra tax cushion under Section 130.
This section allows an additional deduction of up to ₹50,000 per year for interest payments. This benefit sits over and above the ₹2,00,000 limit of Section 22. To qualify, the loan must have been sanctioned between April 1, 2016, and March 31, 2017; the loan amount must be ₹35,000,000 or less; and the total value of the house must not exceed ₹50,000,000. If you fit this window, you can keep claiming this until you pay off the loan.
It is also worth mentioning Section 131, which was introduced in Budget 2019 for affordable housing. Under this section, first-time homebuyers can claim an additional deduction of up to ₹1,50,000 per year on interest paid, provided the loan was sanctioned between 1 April 2019 and 31 March 2022, and the stamp duty value of the property does not exceed ₹45,00,000.
The deduction is available only if the borrower does not own any other residential property at the time of loan sanction. Section 131 applies only to individuals who are not eligible for Section 130 and cannot be claimed alongside it.
New Income Tax Regime on Home Loan Tax Benefits
With the implementation of the new tax regime under Section 202 (Previously known as 115BAC of the Income Tax Act, 1961), there has been widespread confusion amongst many taxpayers with regard to the availability of tax relief on home loans. The following will clear up all the confusion once and for all:
- The benefit for deductions on the interest paid on home loans under Section 22 is not available under the new regime for self-occupied property.
- Similarly, the benefit for the deduction on the repayments made towards the principal amount of the loan is not available under the new regime, which comes under Section 123.
- Also, the deductions under Sections 130 and 131 are not available under the new tax system.
- However, if you have any let-out property, you may deduct the interest incurred on the home loan from your rental income under the new regime with no upper ceiling limit.
Because of the considerable tax deductions that can be enjoyed in the old tax regime but not in the new one, some individuals find it advantageous to retain the old tax regime, especially those who are in high-income slabs. It is always advisable for individuals to calculate their tax liability under both regimes before making a decision.
Conclusion
Taking advantage of your home loan deductions goes beyond simply saving taxes at the end of the year; it involves lowering the actual cost of your property. With the combination of both Sections 22 and 123, a married couple purchasing a home jointly will be able to claim double the deductions if they are co-borrowers. Just ensure you keep your loan interest certificates from the bank handy when filing your returns, and pick the tax regime that protects your deductions.
FAQs on Home Loan Tax Benefit
1
What are the tax benefits available on a home loan?
Tax benefits can be claimed on both the interest and principal components of your loans. The interest part will bring down your taxable income according to Section 22, whereas the principal repayment will bring down your taxable income according to Section 123. The interest portion will get you an extra deduction through Section 130 and Section 131 if you have purchased your property for the first time.
2
Under which sections of the Income Tax Act can I claim home loan deductions?
The main sections include Section 22 for interest below ₹2,00,000, Section 123 for principal below ₹1,50,000, and Section 130/131 for those who satisfy certain conditions of being a first-time home buyer.
3
How much tax deduction can I claim on home loan interest?
In the case of owning a house for your own use, the limit stands at ₹2,00,000 per year. If the house is rented out to tenants, then no limit on interest that can be deducted under the old regime.
4
How much tax benefit is available on principal repayment?
Under Section 123, you are entitled to a deduction of ₹1,50,000. However, note that the pool of ₹1,50,000 is shared with other eligible investments as well, such as PPF, ELSS Mutual Funds, or your insurance.
5
Can I claim tax benefits on both interest and principal repayment?
Yes, both interest and principal amounts paid for the home loan can be considered for claiming tax benefits, but only if you file tax returns according to the old tax slab structure. Interest payments are eligible under Section 22, whereas the amount repaid as principal is allowed as a deduction under Section 123. Both provisions operate independently of each other.
