Applying for a home loan requires careful financial planning. You must assess your financial condition, know your repayment capacity and choose the best loan accordingly so that you can easily repay the amount. Financial planning is not limited to arranging funds to pay the EMIs on time, but it also involves taking advantage of the tax benefits available on home loans.
When you borrow a home loan, you are eligible to get various tax benefits under different sections of the Indian Income Tax Act. Let us look at the home loan tax benefit you can enjoy and lower your annual tax liability.
Tax benefit on repayment of principal amount
When you start repaying the home loan, a significant portion of the EMI goes towards repaying the principal amount, especially during the latter half of the loan duration. The principal amount you repay is eligible for tax deduction from your annual taxable income.
You can claim a deduction up to Rs. 1.5 lakhs in a financial year under Section 80C of the Indian Income Tax Act, 1961. However, to avail of the tax benefits on principal amount repayment, you must meet specific requirements, including:
- You must retain the ownership of the property for at least five years from the date of registration.
- If you sell the property within five years, the tax deductions you have availed earlier will be reversed and added to your income under the ‘gains from a property sale’ head and it will be taxed as per your usual tax bracket.
Tax benefit on repayment of the interest component
The home loan EMI includes both the principal amount, i.e., the actual amount you borrow from the lender and the interest component. When you start repaying the loan, during the first 10-12 years, a major portion of the EMI goes towards repaying the interest amount.
However, you can avail a tax benefit on repaying the interest under Section 24 of the Indian Income Tax Act. You can get tax benefits up to Rs. 2 lakhs in a financial year. This means you can reduce your taxable income up to Rs. 2 lakhs.
If you have availed a home loan in Chennai or any other city in India for buying an under construction property, or to construct your own house, you can claim the tax deduction only after the construction is completed.
Tax benefit on stamp duty and property registration
When you buy a new home, you must pay the registration fees and stamp duty. The government of India levies these charges and it is a vital process to become the legal owner of the property.
While these charges are unavoidable, you can claim tax benefit on the same. This tax benefit on stamp duty and registration fees is covered under Section 80C, and it is inclusive of the overall Rs. 1.5 lakhs limit in a financial year.
Other tax benefits
Apart from the tax benefits discussed above, you can get an additional tax benefit of Rs. 50,000 under Section 80EEE of the IT Act. However, to get this deduction, you must following requirements:
- The value of the home loan must not be more than Rs. 35 lakhs.
- The value of the property you wish to buy must not be more than Rs. 50 lakhs.
- You must have availed of the home loan between April 2016 and March 2017.
Final word
Now that you are aware of the various tax benefits, ensure that you do your due diligence and tax maximum advantage of the tax deduction available to reduce your annual tax outgo.