A home loan is a loan to purchase or construct a residential property in India. Apart from helping borrowers fulfill their dream of owning a home, home loans offer several tax benefits.
Tax benefits on the principal repayment
One of the key tax benefits of taking a home loan in India is the deduction available on the principal repayment. Borrowers may deduct up to Rs.1.5 lacs from the principal repayment of a house loan in a financial year as per Section 80C of the Income Tax Act, 1961. Both privately owned and rented houses are eligible for this deduction.
For example, if Mr. Gupta takes a home loan of Rs.50 lacs for 20 years at an interest rate of 8% per annum, his monthly EMI will be Rs.42,264/-. In the first year, the interest component of the EMI will be around Rs.3.89 lacs, and the principal component will be around Rs.70,716/-. Mr. Gupta can claim a deduction of Rs.70,716/- under Section 80C of the Income Tax Act, 1961.
Tax benefits on the interest paid
Apart from the deduction on the principal repayment, borrowers can also claim a deduction on the interest paid on the home loan. Borrowers may deduct up to Rs.2 lacs of interest paid on a house loan for a self-occupied property in a financial year under Section 24 of the Income Tax Act, 1961. For rented property, there is no upper limit on the deduction.
For example, if Mr. Sharma takes a home loan of Rs.1 crore for 25 years at an interest rate of 7% per annum, his monthly EMI will be around Rs.68,345/-. In the first year, the interest component of the EMI will be around Rs.7.3 lacs. Mr. Sharma can claim a deduction of up to Rs.2 lacs under Section 24 of the Income Tax Act, 1961, on the interest paid in a financial year.
Tax benefits on the stamp duty and registration charges
Borrowers can deduct the stamp duty and registration fees they paid when buying a property in addition to the deductions allowed for principal repayment and interest paid. Borrowers may deduct up to Rs.1.5 lac in stamp duty and registration fees every financial year under Section 80C of the Income Tax Act of 1961.
For example, if Ms. Singh purchases a property worth Rs.75 lacs and pays a stamp duty and registration charge of Rs.5 lacs, she can claim a deduction of up to Rs.1.5 lacs under Section 80C of the Income Tax Act, 1961, on the stamp duty and registration charges paid.
Tax benefits on pre-construction interest
Borrowers can also claim a deduction on the pre-construction interest paid on a home loan. Pre-construction interest is the interest paid on the loan amount that the lender disbursed prior to the construction of the property being finished. Borrowers may deduct pre-construction interest paid in five equal payments beginning with the year the property is built under Section 24 of the Income Tax Act of 1961.
For example, if Mr. Khanna takes a home loan of Rs.60 lacs for the construction of a property and pays a pre-construction interest of Rs.2 lacs in the financial year 2022, and the construction is completed in the financial year 2023, he can claim a deduction of Rs.40,000/- (Rs.2 lacs divided by 5) in each of the financial years 2023-24 to 2027-28.
Tax benefits on joint home loans
If two or more individuals take a joint home loan, they can claim tax benefits on the principal repayment and interest paid in proportion to their share in the loan.
For example, if Mr. and Mrs. Sharma take a joint home loan of Rs.1 crore, with Mr. Sharma contributing 60% and Mrs. Sharma contributing 40% of the loan amount, they can claim tax benefits on the principal repayment and interest paid in the same proportion.
Tax benefits for first-time homebuyers
In the Union Budget 2019, the government of India announced an additional deduction of up to Rs.1.5 lacs for first-time homebuyers on the interest paid on a home loan. The homebuyer must not have been the owner of any other residential property on the day the loan was approved in order to be eligible for this deduction. This deduction is available over and above the existing deduction of Rs.2 lacs under Section 24 of the Income Tax Act, 1961.
For example, if Mr. Singh is a first-time homebuyer and takes a home loan of Rs.60 lacs for 20 years at an interest rate of 8% per annum, his monthly EMI will be Rs.51,369/-. In the first year, the interest component of the EMI will be around Rs.4.71 lacs. Mr. Singh can claim a deduction of up to Rs.3.5 lacs (Rs.2 lacs under Section 24 and Rs.1.5 lacs under the new deduction) on the interest paid in a financial year.
Tax benefits on the sale of a property
If a property is sold within two years of its purchase, any profit earned on the sale is treated as short-term capital gains and is taxed at the individual’s income tax slab rate. However, if a property is sold after two years of its purchase, any profit earned on the sale is treated as long-term capital gains and is taxed at a flat rate of 20%. To reduce the tax liability on the sale of a property, borrowers can reinvest the profit earned on the sale in another property or certain specified bonds under Section 54 and Section 54EC of the Income Tax Act, 1961.
For example, if Mr. Mehta sells his property for Rs.1 crore after holding it for five years, and the cost of acquisition of the property is Rs.50 lacs, he will earn a long-term capital gain of Rs.50 lacs. To reduce the tax liability on the capital gain, Mr. Mehta can invest the capital gain amount in another residential property or certain specified bonds under Section 54 and Section 54EC of the Income Tax Act, 1961.
Tax benefits on the rental income
The borrower may deduct the interest paid on the house loan from the rental income if the property they acquired with a home loan is rented out. Section 24 of the Income Tax Act of 1961 permits the claim of this deduction, which has no maximum amount. However, the borrower cannot claim a deduction on the principal repayment against the rental income.
For example, if Ms. Patel takes a home loan of Rs.80 lacs to purchase a property and rents it out for Rs.40,000/- per month, her annual rental income will be Rs.4.8 lacs. In the first year, the interest component of the EMI will be around Rs.6.4 lacs. Ms. Patel can claim a deduction of up to Rs.6.4 lacs on the interest paid in a financial year against the rental income earned.
Another major point to remember is that the tax benefits on home loans are available only to the borrower who owns or co-owner the property. In the case of joint ownership, the tax benefits can be claimed only by the co-owner, who is also a borrower on the home loan.
Additionally, it is essential to note that the tax benefits on home loans are subject to change as per the amendments made by the government in the Union Budget. Therefore, borrowers should keep themselves updated with the latest tax rules and regulations to ensure they make the most of the tax benefits available.
The tax benefits of taking a home loan in India can help reduce the overall tax liability of borrowers and improve their financial situation. However, borrowers should carefully evaluate their financial situation and repayment capacity before taking a home loan and claiming all the tax benefits. It is also advisable to seek professional tax advice to maximize the tax benefits available.
Finally, while the tax benefits of taking a home loan can help borrowers save on taxes, it is significant to remember that it is a long-term financial commitment that requires careful consideration and planning. Borrowers should evaluate their financial situation, repayment capacity, and long-term financial goals before taking a home loan to ensure they can comfortably repay the loan while meeting their other financial obligations.