If you have an ongoing home loan or have availed of a home loan quite recently, then there are some tax benefits you can easily enjoy on the EMIs. There are additional tax benefits, announced during the previous budgets, that are applicable even for FY 2020-21. Here is a guide to the tax benefits an individual can avail of on EMI payments for a home loan.
Deduction on Home Loan Repayment of Principal Amount
The home loan EMI paid comprises two components: interest paid and principal repayment. The amount repaid as the principal component in the EMI can be claimed as a deduction per 80C of the income-tax Act (ITA), 1961, for self-occupied properties. If the borrower owns a second home that is not currently occupied or their parents are residing in that house, then the second property will also be considered to be self-occupied.
Financial experts say that if you have a housing loan going with both your homes, then you are entitled to a deduction on the principal amount of the loan repaid for both houses. You can enjoy benefits up to (max) Rs.1.5 lakh. If you have rented out your second house, then it will be referred to as a let-out property. Remember that deductions will be permitted following section 80C in case of a let-out property also. Section 80C deductions can also be claimed for registration charges and stamp duty paid at the time of buying a home.
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Deduction on Interest Paid on a Housing Loan
Besides the deductions on the principal amount repaid on a home loan, as a taxpayer, you can also claim deductions on the home loan interest paid. This is a major home loan tax benefit a borrower gets to enjoy per section 24 for a maximum of up to Rs.2 lakh in each financial year. However, this is valid only for self-occupied properties. If the interest paid exceeds Rs.2 lakh, it will not be carried forward. It will also not be adjusted in any way against any income heads like salary, capital gains, etc., for a self-occupied property.
If you have two houses and the second one is empty or occupied by your parents, then the interest paid on the home loan for the second house will also be covered under section 24. The cumulative deduction available on the home loan interest paid for both houses must not exceed Rs.2 lakh in a financial year.
In the case of a let-out property, no limit on the maximum interest can be claimed. However, the loss that is going to be adjusted against any other income head, such as salary, cannot be more than Rs.2 lakh for a financial year. The remaining loss under ‘income from house property’ may even be carried over for up to eight years. However, it can only be adjusted against incomes derived from house property.
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Extra Deduction on Purchase of an Affordable Home
If you have bought a house under the category of affordable housing, then you can avail of an additional deduction on the home loan interest paid for buying the house. You can claim this deduction under section 80EEA for up to Rs.1.5 lakh during a financial year. Per section 24, it is available above the deduction for up to Rs.2 lakh. Therefore, as a taxpayer, you can claim up to Rs.3.5 lakh as a deduction in a financial year when purchasing an affordable home.
You will not be able to claim the same amount twice under two different sections.
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Deduction Under Section 80EE
This deduction was reintroduced in FY 2016-17 for first-time homebuyers seeking a home loan. Following Section 80EE, taxpayers who had taken a home loan in FY 2016-17 could claim an additional tax deduction of up to Rs 50,000. At present, a housing loan borrower who pays interest on the home loan can claim a deduction of interest paid from their gross total income. The amount can go up to Rs.2 lakh in a year per Section 24. This deduction of Rs.50,000 had been introduced during Budget 2016 and is set above the Rs.2 lakh limit.
Even though this tax benefit is not available for new home loans taken post 1 April 2017, if you have availed of a home loan during FY 2016-17, then you can claim the deduction till you have repaid the home loan.
So, consolidated housing loan-related deductions can help a borrower get a deduction of Rs.5 lakh, provided it meets all specified conditions. If you are planning to purchase a new home, you can plan the purchase in a way that your housing loan helps fetch the maximum deduction.
The Final Word
Make sure that you have all the correct information regarding a home loan application, including home loan interest rate, home loan eligibility, etc., before making an application. Else, you may face difficulties after the home loan application. For more information, do not hesitate to reach out to us.
