The major purpose of availing of a loan is to assist seekers out of their various financial difficulties or fund planned expenses if they have no funds available instantly. Loans being a financial instrument, are a need-based credit option, i.e., for which they are chosen to serve certain needs. Here, we will discuss home loans and how availing it can provide you with Home Loan Tax Benefit to save taxes.
What is a home loan?
A home loan in India is a secured credit option that is availed to buy a property by providing security or collateral. Home loans provide high-value financing at economical rates and for a long-term repayment tenure. They get repaid via loan EMIs. After full loan repayment, the property’s title gets transferred back to the home loan borrower. Note that the lender possesses legal rights to recoup outstanding loan proceeds by property’s sale if the borrower fails to repay the EMIs within the due date.
There are different kinds of home loans:
Home purchase credit option: Availed to buy a home.
Home improvement credit option: Availed to renovate/repair a home.
Home Construction Loan: Availed to form a new home.
Land purchase loan: Availed to purchase a plot of land for own home construction.
Home extension loan: Availed to add in another floor, garage, room, kitchen, or bathroom etc.
Top-up home loan: Permits to borrow funds over the outstanding loan proceed at a nominal rate of interest and for any purpose.
Home loan balance transfer: Permits to switch lenders as well as transfers outstanding home loan amount to avail better conditions and reduce interest outgo.
Home loan tax benefit
While a home loan is basically considered to be a credit option to buy a home, such credit options also can be obtained for buying a land plot, homes for residential purposes or for renovation needs. With a home loan, individuals can avail of the listed home loan tax benefit:
∙ Section 80 C benefit: Deduction on a tax of up to Rs 1.50 lakh annually for repaying the principal amount on a home loan. This home loan tax benefit is inapplicable on the purchase of home renovation or residential plot loans. Moreover, this limit of Rs 1.50 lakh is subject to rules applicable to different qualifying expenses/investments as per Section 80 C like PPF, EPF, life insurance premium, ELSS funds etc.
∙ Interest component deduction towards loan availed as per Section 24 (b). Section 24 (b) of the prevailing IT Act provides conditions as per which seeker of home loan can claim a tax deduction on home loan interest component repayment. As per Section 24(b), individuals can claim a tax deduction of up to Rs 2 lakh.
∙ An additional interest payment deduction for a home loan is even available as per Section 80EE of the IT Act. This advantage is available just to the first-time home loan seekers who are buying the property under the scheme – affordable housing. Limit of interest benefit as per Section 80EE has a maximum annual limit of Rs 50,000.
Tax benefit on second home loan
Is availing tax benefit on second home loan possible? This is one of the most or frequently asked questions by many home loan seekers who avail their second home loan. Yes, they can avail of tax benefit on a second home loan. Tax benefit on 2 home loans taken for buying of 2 self-occupied properties can get claimed as per Section 80 C and Section 24 (b) of the IT Act. However, earlier, this was not the case. Before, if an individual had over 1 home property, they could claim the tax benefit on a home loan just against the self-occupied property, which can just be one. For the 2nd property, however, individuals had to make the tax payments depending on the notional rent. Note that notional rent is an amount of income you would receive if you put the home on rent. However, in the 2019 interim budget, a proposal was announced wherein individuals could claim their second home as self-occupied property. This proposal was announced to assist home loan seekers in availing tax benefit on second home loan.
|Home loan tax benefit|
|Income tax act Section||Home loan tax deduction nature||Maximum deductible amount|
|Section 80 C||Principal (Involving registration and stamp duty fees)||Rs 1.50 lakh|
|Section 24 (b)||Interest||Rs 2 lakh|
Joint home loan tax deduction
If the home loan is availed jointly, each home loan holder can claim a tax deduction for home loan interest component repayment for up to Rs 2 lakh each as well as principal repayment as per Section 80 C of up to Rs 1.50 lakh each for their tax returns.
For claiming this tax deduction, they must also be the property co-owner taken on the home loan. Thus, home loans availed jointly with your family members can assist you in claiming larger home loan tax benefit.
|Tax deduction Section||Maximum tax deduction||Conditions|
|Principal (80 C)||Rs 1.50 lakh||Home property must not be sold within five years of their possession.|
|Interest component (24b)||Rs 2 lakh||The loan should be taken for construction/purchase of a home, and construction should be completed in 5 years from the financial year-end when the home loan was availed.|
|Interest component (80 EE)||Rs 50,000||The loan amount taken must be Rs 35 lakh or even less, and the value of the property must not surpass Rs 50 lakh.|
|Stamp duty (80 C)||Rs 1.50 lakh||This can be claimed just in the years’ such expenditures are incurred.|
|Interest component (80 EEA)||Rs 1.50 lakh||The stamp property value must be Rs 45 lakh or below. If not, taxpayers are not at all eligible to claim a tax deduction as per Section 80EE.|
How can you claim the home loan tax benefit?
The procedure or process to claim the home loan tax benefit is as listed:
∙ Ensure residential house property is owned by you. In the event or case of a joint home loan, make sure to stay the home’s co-owner.
∙ Compute the overall amount that you can claim a tax deduction.
∙ Give your employer your home loan interest certificate. Doing so would assist them in adjusting your TDS.
∙ On failure to follow this measure, you must file your income tax returns.