How to Claim Home Loan Tax Benefits in India

Owning a home in India is a financial milestone accompanied by tax advantages that can be leveraged through a home loan. These benefits are a component of financial planning, as they can lower a taxpayer’s annual liability. The structure of these tax provisions allows homeowners to reduce their taxable income, making property ownership more financially manageable over the long term.

Eligibility Criteria for Claiming Tax Benefits

To qualify for home loan tax deductions, a taxpayer must meet foundational requirements. The primary condition is that the individual claiming the benefit must be an owner of the residential property and a borrower on the loan. If the property is jointly owned and the loan is taken jointly, each co-owner who is also a co-borrower can claim tax benefits.

The claim must be in proportion to their share of the loan, provided they are both servicing the loan repayments. These benefits are specifically for residential house property, which can be either self-occupied or rented out.

Tax Deduction on Principal Repayment

The repayment of the principal portion of a home loan is eligible for a tax deduction under Section 80C of the Income Tax Act. This provision allows a taxpayer to deduct the principal paid during a financial year from their gross total income, up to a maximum of ₹1.5 lakh. This deduction can only be claimed after the construction of the property is complete and the taxpayer has received a completion certificate.

A condition relates to the holding period of the property. If a homeowner sells the property within five years of possession, any tax benefits claimed on the principal repayment will be reversed. The total amount of the principal deduction claimed is added back to the owner’s income in the year the property is sold. This rule is in place to discourage using these tax benefits for short-term property trading.

The ₹1.5 lakh limit under Section 80C is a consolidated cap that includes various other eligible investments and expenses. The home loan principal repayment is one of many items that fall under this umbrella, including:

• Contributions to the Employees’ Provident Fund (EPF)
• Public Provident Fund (PPF)
• Life insurance premiums
• National Savings Certificates

Section 80C also allows for the deduction of costs incurred for stamp duty and registration charges at the time of property purchase. These one-time expenses can be claimed within the ₹1.5 lakh limit, but only in the financial year in which they were paid.

Tax Deduction on Interest Paid

The interest component of home loan repayments is addressed under Section 24(b) of the Income Tax Act. The rules for this deduction vary based on how the property is used, with different treatments for self-occupied and rented properties.

For a self-occupied property, where the owner or their family resides, the maximum interest deduction is capped at ₹2 lakh per financial year. To be eligible for this full limit, the loan must have been taken on or after April 1, 1999, for purchasing or constructing a property. Additionally, the construction must be completed within five years from the end of the financial year in which the loan was taken. If these conditions are not met, the interest deduction limit is reduced to ₹30,000.

When the property is rented, the tax rules are more generous. In this case, the entire amount of interest paid on the home loan during the financial year can be claimed as a deduction from rental income, with no upper ceiling.

If the interest paid on a rented property exceeds the rental income, it results in a “loss from house property.” This loss can be set off against other sources of income, like salary or business income, up to a maximum of ₹2 lakh per year. Any loss beyond this cap can be carried forward for up to eight assessment years to be set off against future income from house property.

Interest paid during the pre-construction period is also eligible for a deduction. This accumulated interest can be claimed in five equal annual installments, starting from the financial year in which construction is completed and the owner takes possession. This installment is included within the overall interest deduction limits applicable under Section 24(b).

Additional Deductions for Certain Homebuyers

An additional tax benefit was introduced for first-time homebuyers under Section 80EEA of the Income Tax Act. This deduction applies only to home loans sanctioned between April 1, 2019, and March 31, 2022, and is not available for loans sanctioned after this period. This benefit is available over and above the deduction under Section 24(b).

To claim this deduction, the individual must have been a first-time homebuyer who did not own any other residential property when the loan was sanctioned. The stamp duty value of the property could not exceed ₹45 lakh. Additionally, the taxpayer cannot be eligible to claim a deduction under the similar Section 80EE.

Taxpayers meeting these criteria can claim an additional deduction of up to ₹1.5 lakh per financial year for interest paid. The combined effect of Section 24(b) and Section 80EEA allowed an eligible homebuyer to claim a total interest deduction of up to ₹3.5 lakh.

How to Claim Home Loan Tax Benefits

To claim the tax benefits, taxpayers must have the proper documentation. The primary document is the home loan interest certificate, provided annually by the lending institution, such as a bank or housing finance company. This statement provides a breakdown of the principal and interest components paid during the financial year.

A fundamental consideration is the choice between India’s tax regimes. The deductions for home loan principal under Section 80C and interest under Section 24(b) for a self-occupied property are only available to taxpayers who opt for the Old Tax Regime. If a taxpayer chooses the New Tax Regime, they must forgo these specific deductions.

The process of claiming the deductions involves declaring the amounts in the annual Income Tax Return (ITR) filing. Salaried individuals can also submit the home loan certificate to their employer, who can then adjust the monthly Tax Deducted at Source (TDS) to account for the deductions.