A home loan is a long-term investment. It works as a tax saving tool. You can claim tax benefits on the principal and repayment of your principal. You can also claim tax benefits on interest on housing loans. Here is a guide to housing finance and tax planning.

How do you save tax on your housing loan?

There are three sections of the Income Tax Act dealing with tax saving on housing loans.

1. Section 80C: You can claim tax benefits of up to Rs 1.5 lakh on repayment of the principal amount of your loan.

2. Section 24: You can claim tax benefits of up to Rs 2 lakh on repayment of interest on housing loan. This is applicable for a self-occupied property. Suppose you are letting out your property. Then there is no maximum limit on the tax benefit amount. So, you can claim the entire interest amount as a tax benefit. You can do this even if the amount exceeds Rs 2 lakh.

3. Section 80EE: Suppose you are a first-time buyer. Then you can claim an extra Rs 50,000 as tax benefits on the interest repayment.

What are the conditions for claiming tax benefits on your housing loan?

You can claim tax benefits on housing loans only after the construction is complete. So, tax benefits are not available while the property is under construction. This holds even if borrowers have started repaying EMIs to their housing finance companies.

It is common for construction to be delayed. So, the rules have been revised. You can now claim tax benefits in certain situations. For example, you can get a benefit if the construction ends within five years of you taking the loan. Earlier this was only three years.

Under Section 24, you can claim interest on housing loan for the under-construction period. You can do this in five equal instalments for five years. This starts from the year construction ends. Suppose the construction or buying of a property is not completed within five years. Then you can claim a maximum benefit of Rs 30,000 only.

Does the tax benefit amount increase?

Suppose the construction of a property is incomplete after five years. You take a new home loan to repay an existing home loan. Then your tax benefit under Section 24 does not increase to Rs 2 lakh.

What are the risks of buying an under-construction property?

Properties under construction are cheaper than fully constructed properties. So, they are more attractive for buyers. But remember the bigger picture during your financial and tax planning.

Real estate projects can face delays. This puts extra financial pressure on the buyer. Suppose you are living in a rented space. Then you are paying both rent and EMIs.

Tax benefits are only available when the property is fully completed and bought. Suppose this process is delayed for a certain time. Accordingly, the tax benefits you could enjoy are also delayed for that time.

Suppose construction gets stuck for more than five years. It could also happen that the building project fails completely. Then you as a buyer lose out on the tax benefits. You also get stuck repaying your entire loan amount to your lender on an incomplete or failed investment.

How can you afford a fully constructed property?

Fully constructed properties are expensive. This puts off many buyers. They may not be able to afford a high loan amount. Or they could have low credit scores. This results in a lower loan amount and lower LTV (loan to value).

Taking a home loan is a way to improve credit score. It is considered a ‘good loan’. You can also take a joint loan with a close relative. The lender will consider their income and credit score. They will increase the loan amount accordingly.

Conditions for claiming tax benefits on joint home loans

To enjoy tax benefits, the second party has to be a co-owner as well as a co-borrower. Both holders can separately claim tax benefits on their joint home loan. They can do this when their individual share of the property is clearly defined. The ratio of tax benefit is the same as the ratio of the property share.

Summing up

There are many home loans offered by housing finance companies. Your financial and tax planning should consider a few things. How can you improve credit score? What is the interest on housing loan that you would have to pay? Choose your home loan carefully. Then you can enjoy the benefits of a wise investment as well as smart tax saving.