Owning a home offers generous tax deductions under the Income Tax Act, and recent budget revisions sweetened the deal even further. The government often allows various tax rebates for individuals seeking home loans. Recently, Finance Minister Nirmala Sitharaman proposed extending the deadline for claiming extra deductions on home loan interest until March 31st, 2024, benefiting anyone who borrowed before March 2022.
What is a Home Loan?
A home loan is a secured loan you can take from a bank or other lender to purchase a property. The loan is secured by the property itself, which means that if you default on the loan, the lender can foreclose on the property and sell it to recoup their losses.
Home loans typically have fixed interest rates, which means that the rate at which you pay interest on the loan will remain the same throughout the term of the loan. This can provide you with predictability and stability in your monthly payments.
Tax Benefits on Home Loans
Owning a home in India can be a great investment, and the government offers several tax benefits to encourage people to borrow for their dream home. Home loan tax benefits that you can avail include:
Deduction on Principal Repayment (Section 80C)
You can claim a deduction of up to ₹5 lakhs on the principal amount you repay in a financial year under Section 80C of the Income Tax Act. This deduction applies to self-occupied and rented properties, but the property should not be sold within five years of possession to retain the benefit.
Deduction on Interest Payment (Section 24(b))
You can claim a deduction of up to ₹2 lakh on the interest paid on your home loan for a self-occupied property. It applies only to loans taken for the acquisition or construction of the property and should be completed within five years.
Additional Deduction for First-Time Home Buyers (Section 80EEA)
First-time home buyers can claim an additional deduction of up to ₹1.5 lakhs on the interest paid on a home loan, over and above the ₹2 lakhs limit under Section 24(b). These benefits apply to loans taken between April 1, 2019, and March 31, 2024, for properties with a stamp duty value of up to ₹45 lakhs.
Joint Home Loan Benefits
If you take a home loan jointly, both co-borrowers can claim separate deductions on the principal amount and interest payment under their respective income tax returns. This can significantly increase your total tax savings.
Types of Home Loans
The Indian housing market offers various home loan options to cater to various needs and financial situations. Some popular types of loans are:
Home Loan for Purchase
This is the most common type used to finance the purchase of a ready-to-move-in apartment, a builder’s floor, or an independent house. The loan amount can be up to 90% of the property value. Interest rates vary depending on factors like loan amount, tenure, credit score, and lender.
Home Construction Loan
These loans are ideal for those who want to build their own house on a plot of land they already own. The loan amount is amount can be up to 80% of the construction cost and is disbursed in stages based on construction progress. However, the interest rates may be slightly higher than purchase loans.
Home Improvement Loan
These loans are meant for renovating or expanding an existing property. These can be used for various purposes like painting, flooring, electrical work, etc. The loan amount depends on the nature and extent of the renovation.
Plot Loan
A plot loan, also known as a Land Loan, is a type of secured loan offered by banks and Non-Banking Financial Companies (NBFCs) to help individuals or businesses purchase a plot of land. Interest rates on these loans are usually higher than home loans, as there is no existing structure to act as collateral. Expect rates ranging from 8.5% to 12% per annum.
Balance Transfer Loan
Balance transfer loan allows you to switch your existing home loan from one lender to another with potentially better interest rates or loan terms. The processing fees and other charges may apply to this loan.
Pradhan Mantri Awas Yojana (PMAY)
Pradhan Mantri Awas Yojana is a government-sponsored scheme offering subsidies on interest rates for low-income homebuyers. This loan’s eligibility criteria and benefits vary depending on the sub-scheme (PMAY-G, PMAY-LIG, PMAY-MIG).
Components of Loan Payment
Your home loan’s EMI covers four main parts. These components get tax breaks in different ways under different sections of the Income Tax Act. Here are the main components of a home loan payment:
- Principal: This is the amount of money you actually borrowed from the lender. It is typically paid down in equal monthly installments over the life of the loan.
- Interest: This is the fee you pay to the lender for borrowing the money. It is calculated as a percentage of the outstanding loan balance. The interest rate is usually fixed for the life of the loan, but it can also be adjustable.
- Taxes: Property taxes are assessed by your local government and are based on the value of your home. You can usually choose to have your property taxes escrowed, meaning your lender will collect them as part of your monthly mortgage payment and pay them to the government on your behalf.
- Insurance: Homeowners insurance is required by most lenders to protect your home from damage caused by fire, theft, and other perils. You can also choose to have your homeowners insurance escrowed.
Way Forward
Owning a home in India extends far beyond shelter. It is a secure investment, a tax haven, and a legacy you can build on. With extended tax benefits and diverse loan options, this is the right time to consider homeownership. Research, compare, and make a well-informed decision for the ownership of your dream home.
Key Takeaways
- Home loans are secured loans for property purchases with fixed interest rates that predict and stabilize monthly payments.
- EMI for home loans covers principal, interest, taxes, and insurance, and each component has different tax benefits under various sections of the Income Tax Act.
- Deduction on principal repayment under Section 80C is up to ₹1.5 lakhs per financial year.
- There is also an additional deduction for first-time home buyers under Section 80EEA up to ₹1.5 lakhs on interest paid.
- Co-borrowers can also claim separate deductions, enhancing total tax savings under joint home loans.
