Home Loan Tax Benefit: Tax Deductions & How to Claim

Overview of Home Loan Tax Benefits

Buying a home is one of the most significant financial decisions an individual can make. To ease the financial burden, the Indian government offers various tax benefits to homebuyers. These home loan tax benefits not only reduce your tax liability but also make homeownership more affordable. From deductions on interest payments to benefits on principal repayment, these provisions are designed to support individuals investing in residential property. Understanding how these tax benefits work can help you plan your finances better and make the most of your housing investment.

Home Loan Interest Tax Deduction Under Section 24

One of the primary components of a tax benefit on home loan is the deduction available on the interest paid towards the loan. This falls under Section 24(b) of the Income Tax Act.

1. Eligibility Criteria

To claim a home loan interest tax benefit under Section 24, the loan must be taken for the purchase, construction, repair, or renovation of a residential property. Importantly, the construction of the property should be completed within five years from the end of the financial year in which the loan was taken. Both self-occupied and rented properties qualify for this deduction.

2. Deduction Limits Based on Property Type

For a self-occupied property, you can claim an interest on home loan deduction of up to ₹2 lakh per financial year. In case the property is let out or deemed to be let out, there is no upper limit on the interest that can be claimed as a deduction. However, the overall loss under the head 'Income from House Property' that can be set off against other income heads is capped at ₹2 lakh.

3. Interest Paid During Pre-Construction Period

The interest paid during the pre-construction period (i.e., before the construction is completed) is also eligible for deduction. This pre-construction interest can be claimed in five equal installments starting from the year in which the construction is completed. However, the total deduction, including current-year interest and pre-construction interest, should not exceed the ₹2 lakh limit in the case of self-occupied properties.

Deduction on Principal Repayment Under Section 80C

Apart from the home loan interest exemption, borrowers can also claim a deduction on the principal component of the EMI under Section 80C of the Income Tax Act. The maximum limit under this section is ₹1.5 lakh per financial year.

This deduction is available only if the property is not sold within five years of possession. If sold before the five years, the claimed deductions will be reversed and added to your income in the year of sale. This home loan tax benefit is available to individual taxpayers and Hindu Undivided Families (HUFs).

Additional Deduction Under Section 80EE

To further encourage home ownership among first-time buyers, the Government of India introduced Section 80EE under the Income Tax Act. This provision offers an additional deduction of up to ₹50,000 per financial year on the interest paid towards a home loan. It is specifically targeted at individuals purchasing their first residential property and provides tax relief in addition to the existing benefits available under Sections 24 and 80C.

To qualify for this home loan tax benefit, several conditions must be met:

• The home loan must have been sanctioned between April 1, 2019, and March 31, 2022.
• The loan amount should not exceed ₹35 lakh, ensuring the scheme supports affordable housing.
• The stamp duty value of the residential property should not exceed ₹50 lakh.
• The applicant must be a first-time homebuyer, meaning they should not own any other residential property on the date the loan is sanctioned.

The interest on home loan deduction under Section 80EE is in addition to the ₹2 lakh limit under Section 24(b) for interest payments on home loans and the ₹1.5 lakh limit under Section 80C for

principal repayments. It serves as a valuable tax-saving opportunity for eligible buyers looking to make their first home purchase more affordable.

Additional Deduction Under Section 80EEA

Introduced in the Union Budget 2019, Section 80EEA was designed to give a significant push to the government’s vision of “Housing for All” by making affordable housing more accessible and financially viable for first-time homebuyers. This section allows an additional deduction of up to ₹1.5 lakh per financial year on the interest paid on home loans, in addition to the benefits already available under other sections of the Income Tax Act. It serves as a valuable tax benefit for home loan interest, particularly beneficial for individuals purchasing their first property in the affordable housing segment.

To be eligible for this deduction under Section 80EEA, the taxpayer must meet the following conditions:

• The home loan must be sanctioned between April 1, 2019, and March 31, 2022. This ensures that the provision supports recent homebuyers aiming for budget-friendly properties.
• The stamp duty value of the residential property must not exceed ₹45 lakh, thereby targeting buyers investing in genuinely affordable housing.
• The individual must not be claiming deductions under Section 80EE to avoid overlapping benefits.
• At the time of loan sanction, the taxpayer should not own any other residential property, making this exclusively applicable to first-time buyers.

This home loan interest tax benefit under Section 80EEA is in addition to the ₹2 lakh deduction available under Section 24(b) for interest on home loans and the ₹1.5 lakh deduction under Section 80C for principal repayment. By stacking these benefits, a qualified first-time homebuyer can enjoy a substantial reduction in their annual taxable income, making homeownership not just more achievable but also more tax-efficient.

New Income Tax Regime on Home Loan Tax Benefits

With the introduction of the new income tax regime under Section 115BAC, taxpayers can opt for lower tax rates by foregoing various exemptions and deductions, including most home loan tax benefits.

• No deduction is allowed for interest on a home loan under Section 24(b) for self-occupied properties. This means that the widely availed ₹2 lakh annual deduction on home loan interest is no longer available under the new regime, which can significantly increase taxable income for homeowners. For those who are still paying a substantial portion of their EMIs toward interest, this could result in a notable reduction in tax savings.
• Deductions under Section 80C, including principal repayment of a housing loan, are also not available. Since principal repayment often constitutes a sizable part of the ₹1.5 lakh Section 80C deduction limit, homebuyers lose out on a critical advantage. Additionally, exclusions of other 80C investments, such as PPF, life insurance premiums, and ELSS, further reduce flexibility in tax planning under the new structure.
• Additional deductions under Sections 80EE and 80EEA are not applicable. These sections were introduced to support first-time homebuyers and those investing in affordable housing. Losing these benefits under the new regime could be a drawback for middle-income buyers looking to own their first home.

Hence, if you’re claiming a tax benefit on a home loan, it may be more beneficial to remain under the old tax regime, especially if your loan amount and interest outgo are substantial. Taxpayers should evaluate both regimes to determine which offers greater overall savings.

Conclusion

Home loan tax benefits are a valuable tool for reducing your annual tax burden while building a long-term asset. From Section 24 and 80C to additional deductions like 80EE and 80EEA, these provisions offer significant savings. However, with the introduction of the home loan in new tax regime, it's essential to weigh your options carefully. If you’re repaying a substantial home loan, the old regime may provide more meaningful relief through interest on home loan deductions and other associated exemptions. Always consult a tax advisor to determine the most tax-efficient route for your situation and maximize your home loan interest exemption and other housing loan tax benefits.

FAQs on Home Loan Tax Benefit