Home Loan Tax Benefits: Claim a Deduction of Both Principal and Interest Components of your Home Loan EMIs

Owning a home in one’s name has always been the middle-class Indian’s dream. A sense of safety and ownership comes with it—also good marriage proposals according to our moms at least. Not only this, but you can also claim tax benefits on your home loan EMIs.

But let’s be honest, purchasing your home requires huge capital, especially if you live in the city due to higher real estate prices, construction costs, and rising inflation rates. How can one possibly afford all this? 

Don’t worry, there is one superhero who will fly in to save your day. This is none other than “Home Loans”. A home loan reduces your burden to secure capital for your dream home. With a good credit score and a steady income, you will be eligible for a good loan amount. 

In this article, I’ll talk about the different sections under which you can claim tax benefits, the maximum deductions, and how to optimize to maximize tax savings.

Type of Tax Benefits on Home Loans

You can claim tax benefits majorly under 2 sections of the IT Act. We’ll also be covering a bonus section to claim deductions if eligible. 

1. Deduction on Principal Repayment Under Section 80C:

One can claim a maximum deduction of Rs 1.5 Lakhs under Section 80C for the principal component of your EMI. Do note that this is within the overall limit of 80C including investments in other eligible instruments such as PPF, ELSS, SSY, etc. 

2. Deduction on Interest Component Under Section 24B:

One can claim a maximum of up to Rs 2 Lakhs as a deduction for the interest component under Section 24B of the IT Act.  You can also claim an interest deduction for pre-construction property. 

3. Deduction on Interest Paid Under Section 80EEA:

One can claim an additional deduction of up to Rs 1.5 Lakhs of interest paid if the home loan was sanctioned between 1st April 2019 and 31st March 2022.

Section 80C

Any individual or HUF can claim deductions under Section 80C. As already mentioned above, one can claim a maximum of Rs 1.5 Lakhs as a deduction for the home loan principal component. In the case of co-borrowers, each of them can claim benefits individually.

Here are a few things to keep in mind:

• Section 80C can be claimed for principal repayment of both self-occupied and let-out properties. 
• You can also include stamp duty and registration charges while claiming Section 80C. Do note you can only claim it once. 
• Tax benefits for the principal component are allowed only after the completion of the construction of the house property. 
• You cannot sell the house for 5 years after possession if you want to claim the deduction. 
• If you sell before 5 years, any deductions you’ve claimed in previous years will be reversed and will become taxable in that FY. 

How to claim the deduction when filling out ITR? 

When filing returns, you will need to submit certain documents as proof to claim deductions under Section 80C. Here’s a list of things one must do: 

• Property ownership details.
• Loan Document that specifies the break-up of principal and interest components of one’s EMIs. 
• A document specifying the purchase date of the home or proving completion of construction. 
• Proof that the home loan is in the owner’s name. 
• Proof of municipal taxes paid in the year.

Section 24(B)

Under Section 24B one can claim up to Rs 2 Lakhs as a deduction on the interest component. Just like in Section 80C, one can claim this deduction on both self-occupied and let-out properties. 

Here are a few important things to note: 

• The maximum limit is Rs 2 Lakhs in an FY in the case of self-occupied property. 
• There is no limit to how much interest you can deduct in case of a let-out property. 
• In the new tax regime, you will only be eligible to utilize Section 24B in case of let-out property. 
• You can claim a maximum of Rs 2 Lakhs as loss from house property. This can be claimed from the year of completion of the construction of the house property. 

The limit of Rs 2 Lakhs can be reduced to Rs 30,000 in these cases: 

• If a home loan was taken before 1st April 1999 for house property.
• If a loan was taken after 1st April 1999 for any other purpose other than acquisition or construction. 
• The construction of the property is not completed within 5 years from the end of the financial year in which the loan was taken. 

How to claim the deduction while filing your ITR? 

The documents needed to claim deductions under Section 24B are the same as Section 80C which is already covered in detail above.

Section 80EEA

This deduction is only available to individuals whose loans have been sanctioned between 1st April 2019 to 31st March 2022. You will get an additional deduction of Rs 1.5 Lakhs on the interest component, which is over and above the Rs 2 Lakhs deduction under Section 24B. 

Here are a few other important rules to avail of this section: 

• Only available under the Old Tax Regime.
• Loans should be taken from a financial institution or housing finance company. 
• The Stamp Duty value of the house property should be less than 45 Lakhs. 
• An individual should not have claimed a deduction under Section 80EE.
• The taxpayer should be a first-time home buyer.

Tax Benefits on Joint Home Loan

Did you know that you can almost double your tax benefits if you took a joint home loan? Tax Benefits aren’t the only reason one should opt for joint loans. You will also have a higher chance of loan approval, eligibility for a bigger loan amount, and a lesser burden of repayment. 

Co-borrowers must be co-owners to be eligible to claim deductions. Co-borrowers can individually claim Section 80C and Section 24B for principal and interest components respectively. 

This is majorly beneficial in the case of a huge loan, where principal repayments in a year exceed Rs 1.5 Lakhs or interest payments exceed Rs 2 Lakhs. With another borrower, the EMI can be split equally and thus you can effectively claim the entire payment made via EMIs in a year. 

Do note that the split up of EMI between the borrowers must be clearly mentioned in the loan agreement. The deductions under both Section 80C and 24B will be allowed in the respective proportion of payment of EMIs.

Common Mistakes to Avoid

• This may sound stupid, but if you’ve taken a home loan, make sure to claim all tax benefits. This is because it’ll reduce your tax burden and also indirectly reduce your effective home loan interest rate. 
• Make sure to have documents such as the ownership deed, the home loan interest certificate, etc which clearly specify ownership and proportion of EMIs. You will need to submit these to claim tax benefits. 
• Borrowers tend to believe they can claim the entire Rs 1.5 Lakhs as principal repayment and Rs 2 Lakhs as interest repayment. This is not true. You can only claim how much ever EMI you’ve paid in a year up to the specified limits.  
• Certain co-owners claim the tax benefits although they aren’t co-borrowers in the loan. You cannot claim tax benefits just because you’re a co-owner, you must’ve paid your share of EMIs. 
• You can only claim the portion of EMIs paid by you. Sometimes both co-borrowers claim the entire EMIs individually, leading to a double tax exemption. This is not acceptable.

Frequently Asked Questions

Conclusion

Tackling home loan repayments while trying to understand tax-saving methods can be a tedious process. To simplify, you can majorly benefit from Section 80C and Section 24B of the IT Act if you have a home loan. If you meet the requirement criteria, you can benefit from Section 80EEA as well. 

The tax benefits offered help an individual not only to save taxes but also to bring down the effective home loan interest rate. This is because, in the absence of these benefits, a good portion of your in-hand salary would’ve been paid in taxes. 

Considering all this can be overwhelming to understand, you can get in touch with us at Credit Dharma and we will help you understand all the tax benefits received when you go ahead with your home loan. 

Tax Benefits on your home loan help you in coming one step closer to the dream of owning your own home. You are not only saving a ton in taxes but also can call yourself a proud homeowner and fulfill your dreams.