The tax season is upon us and it is important to know where you can save on tax. Here is a useful guide on home loan tax benefits.

Home loan tax benefits on the principal amount

Section 80C of the Income Tax Act allows you to claim tax benefits on your principal repayment.

  • How much can you claim?

You can claim a maximum of Rs 1.5 lakh. This amount is inclusive of all your other payments. This includes payments towards PPF, equity-oriented mutual funds, fixed deposits, National Savings Certificates, and so on.

  • What are the conditions for making this claim?

You can claim this tax benefit only in the year you make the payment. This benefit is available only after construction is complete. Also, it is only for self-occupied properties.

Suppose you buy an under-construction property. Then you will have to pay service tax. This is because under-construction properties are less expensive than fully constructed ones.

  • What should you be careful of?

Suppose you sell the property within five years of possession. Then the deductions claimed in the past five years will be treated as income. This income will be for the financial year when you sell. You will have to pay tax on this.

Home loan tax benefits on interest repayment

Section 24 of the Income Tax Act allows you to claim tax benefits on interest repayment. Get this tax deduction when you take the home loan for constructing or buying a property.

  • How much can you claim?

You can claim up to Rs 2 lakh on a self-occupied property. Suppose you are renting out your property. Then there is no maximum limit. You can claim the entire interest amount as a tax benefit.

  • What are the conditions for making this claim?

This benefit is available when you are in possession of the house. The construction or buying of the property has to be complete within a certain time. That is five years since the end of the financial year when you took the loan. Suppose the construction is not complete within these five years. Then you can claim a tax benefit of only Rs 30,000.

Suppose you have not made payments for an entire year. You can still claim this benefit. This is because tax is deducted on an accrual basis.

Suppose the interest repayment of your home loan is over before completion of the house. In this case, you can claim the total of the repaid amount. You can claim it in five equal instalments over five consecutive financial years.

Suppose you take a loan from a relative or friend for buying or constructing a house. Then you can claim this tax benefit under Section 24(b).

  • What should you be careful of?

Construction or buying of property should be completed within five years. If not, the benefit drops to only Rs 30,000.

Suppose your property is not self-occupied. You live in a rented place. This could be for reasons of employment or business. Then the maximum tax benefit is Rs 2 lakh.

Home loan tax benefits for first-time buyers

Section 80EE of the Income Tax Act gives first-time buyers an extra tax benefit of Rs 50,000. This is on the interest repayment.

  • What are the conditions for making this claim?

This is available only to first-time buyers. You can claim this benefit only if the registered value of the property is below Rs 50 lakh. Your loan cannot exceed Rs 35 lakh.

  • What should you be careful of?

The tax benefit under this section lasts until repayment is complete. This benefit is available on both self-occupied and non-self-occupied properties. The home loan should be from a bank or a housing finance company.

Some more points to remember

  • Processing fees are tax deductible.
  • You can claim tax deductions on stamp duty and registration charges. These are applicable even when you have not taken the home loan.
  • Suppose you opt for a joint home loan. Then the second party has to be a co-owner and a co-borrower to enjoy the tax benefits.

Summing up

You may opt for a joint home loan. Or you could be a single holder in your home loan application. Either way, consider all aspects when taking a home loan for it. Home loan tax benefits are linked to the completion of property construction. This holds for both principal and interest repayment. Under-construction properties are cheaper. But there is a tendency towards project delay. So, it is financially wiser to opt for constructed properties.