Tax Benefits on Home Loan

A home loan can help you save tax as per the provisions of the Income Tax Act, 1961. The tax benefits on home loans remain unchanged during the latest financial budget in 2020. However, the timeline for availing loans for affordable housing has been extended for a year- till 31st March 2021. 

Home Loan Tax Benefits under Section 24 (FY 2020-2021)

  • For a self-occupied property, you can claim a maximum deduction of Rs. 2 lakhs.
  • Rs. 2 lakh deduction applies only if the construction on the property is completed within 5 years. If the construction is not completed within this period, you can claim only up to Rs. 30,000.
  • If you have given the property on rent, you can claim any amount you have actually paid in the form of interest. There is no limit.

Tax Benefits under Section 80C

  • You can claim a maximum tax deduction of up to Rs. 1.5 Lakh from your taxable income on the principal repayment.
  • You can also claim the stamp duties and registration charges as well paid for your property under this section. It can be claimed only once.

Tax Benefits under Section 80EE 

If you are buying a house for the first time, you can claim the following interest deduction in addition to the benefits already mentioned above under Sections 24 and 80C:

  • First-time homebuyers can claim an additional Rs. 50,000 on the payable interest every financial year.
  • The home loan amount must not be more than Rs. 35 lakhs.
  • The property’s value must be less than Rs. 50 Lakh.

Note: The Union Budget 2020 specifies an additional deduction of Rs. 1.5 lakh for interest repayment on home loan taken by 31 March 2021 under the Section 80EEA, to purchase a house costing up to Rs. 45 lakhs. 

Deduction for Joint Home Loan

If a home loan is availed of by more than two persons, each of the individual is eligible for claiming a tax deduction on the interest paid up to Rs. 2 lakh each. Tax can be deducted on the principal paid as well for an amount up to Rs. 1.5 lakhs each. However, all the applicants should also be the co-owners of the property to claim the deduction. Therefore, availing of a joint home loan can give you greater tax benefits.

Tax Benefits on Second Home Loan

In case you have availed a home loan to buy a second house, the entire interest amount accrued on that loan for a financial year is available for deduction without any ceiling limit under Section 24B.

HRA and Tax Benefits

If you are staying in a house that is on rent and you have also taken a home loan for your own property. In such cases, you can not only claim tax deductions on your loan but can also claim House Rent Allowance (HRA) deductions on the rent you are paying. However, note that you can claim this deduction only if you live in the house that you have rented. You cannot claim if your dependent family members are staying in the house without you. You can claim HRA depending on the lowest value of:

  • The actual HRA that you receive from your employment.
  • 50% of your salary if you live in a metro city or 40% if you live somewhere else.
  • The actual rent minus 10% of your salary.

The process to claim Tax Benefits on Home Loans

Claiming tax benefits on a home loan is a simple process. Below are the steps to claim your tax deduction.

Step 1: Calculate the tax deduction to be claimed.

Step 2: Ensure that the house is in your name or you are the co-borrower of the loan.

Step 3: You need to submit your home loan interest certificate to your employer to adjust the tax deductible at source.

Step 4: In case you do not perform the above step, you would have to file the tax return by yourself.

Step 5: In case you are self-employed, you are not required to submit these documents anywhere. Just keep them handy if they are required in the future.

How to Calculate Tax Benefits on Home Loan?

The easiest way to calculate tax benefits on a home loan is by using an online calculator. You just need to enter your home loan details and click on calculate. The details you will generally need are:

  • Loan Amount
  • Tenure
  • Rate of Interest
  • Starting Date of your loan
  • Your Gross Annual Income
  • Existing Deduction Under 80C/D

Tax Benefits on an under-construction property

To claim tax benefits for a property under construction under section 80C. The following rules apply for claiming the tax deduction under this section-

  • If the construction is completed within 5 years, a deduction of Rs. 2 lakh is applicable.
  • If the construction of the property is not completed within 5 years, only up to Rs. 30,000 is deductible.

Home Loan Tax Benefits for Delayed Property Possession

If there is a delay in getting your housing project in time as agreed by your builder, you can still claim tax deduction under Section 24(b) of the Income Tax Act that allows a homeowner to claim tax deductions for 3 years of delay in property possession. However, the 2016 Budget has introduced some changes in this section of the Income Tax Act.

Changes Under Section 24(b) of the Income Tax Act

To understand the changes, first, you need to understand what constituted Section 24(b). Before the 2016 Budget, Section 24(b) of the Income Tax Act allowed homeowners of any self-occupied property to get deductions of up to Rs. 2 lakh for the interest paid on the loan taken to purchase a property, provided the developer hands over the property to the homeowner within 3 years of getting the loan. If the property is taken on lease, then the limit on deductions is removed.

However, if the developer has failed to hand over the possession of the property to the owner within the stipulated 3 years of getting the loan, then the deduction limit came down to Rs. 30,000.

With the new changes introduced in Budget 2016, the period for which possession can be delayed has been extended from the earlier 3 years to 5 years. Homeowners with loans can now enjoy 2 more years of tax benefits in case of any delay in property possession. The amount of benefit that can be availed is still capped at Rs. 2 lakh. This amendment will apply to the existing and new home loan borrowers.

% of Tax Benefits You Might Lose If Possession of House Delayed

A home loan borrower can end up losing up to 85% of the tax benefits available on the home loan premium payment if the builder fails to deliver possession of the house within 5 years.

In case of the delayed possession over the given time, considering that the tax deduction limit over the first 5 years is Rs. 2 lakh and the tax-deductible limit after 5 years is Rs. 30,000, a home loan borrower faces a loss of Rs. 2 lakh - Rs. 30, 000 i.e. Rs. 1.7 lakh.

This amount of loss is equal to 85% of the savings a homeowner could have saved via tax deductions.

Step 7: Processing the property documents

After receiving the official sanction letter approving your loan, you need to submit the original property documents to the bank, which will remain in the bank’s custody until you repay the loan amount in full. The original property documents include the chain of ownership acquisition, transfer of ownership, your Sale Agreement execution, NOCs from concerned authorities along with the name, ID, and address proof of the seller. The bank will verify the property documents before approving your loan. Bank also sends their representative to physically visit the property site before the loan approval. However, the bank may also double check the property papers to make sure everything is in order. 

Step 8: Loan disbursal

This is the final stage of the home loan application process. It includes the registration of the loan deal i.e. acceptance of Terms and conditions of Sanction by the borrower, the signing of the loan agreement/documents, and the disbursement of loan as per terms stated in the sale agreement, including down-payment by the lender.