For many people buying a home is a dream to accomplish. A dream catcher would ask a lot of questions on the road to the destinations, and when it’s about home loans and their tax benefits, you are at the right place. Have you been aware that the Indian government has always shown a great amount of inclination towards the encouragement of citizens to invest in houses? This is the very sole reason that home loans are eligible for tax deduction under Section 80C. When you buy a house with a home loan, it comes with a multitude of tax benefits that could potentially reduce your tax outgo. So, let’s keep talking about this, shall we?
But, before we go to that part, let’s understand home loans.
What is a Home Loan?
A home/housing loan, often known as a mortgage, is a sum of money borrowed by an individual from a bank or other lending institution. The borrower must repay the loan amount plus interest in Easy Monthly Installments, or EMIs, over a period of time that can range from 10 to 30 years, depending on the loan type.
One of the most important things that you need to know is that there are also different types of home loans; it does not just pertain to one kind.
What are the Types of Home Loans?
Here is a list that can blow your mind:
- Home Purchase Loan
- Top-Up Home Loan
- Land Purchase Loan
- Home Improvement Loan
- Land Purchase Loan
- Home Extension Loan
- Joint Home Loan
- Home Loan Balance Transfer
When we say a home loan, we don’t just mean buying a house right away, right? It is much more than that. That is when the different types of home loans come to play, whether it is constructing a home on your plot, reconstructing an old home, just making some small changes, and so much more.
But, every type of loan will do its part in giving you the best benefits, and the biggest of these benefits is the factor that it has an extensive tax benefit. So, get ready to estimate home loan EMIs, tenures, principles, and much more because after hearing about the perks it had, you would not want to step back from making this decision.
The Tax Deduction on Home Loans
The principal and interest payments on a house loan are combined. Both of these groups are eligible for tax deductions under Section 80C and Section 24(b) of the Income Tax Act, respectively.
1. Deductions on the Principle Amount
On the principle repayment component of the EMI, you can claim a tax deduction of up to Rs 1.5 lakh for a financial year under section 80(c) of the Income Tax Act. This discount is only available after the residential house property has been completed. This benefit will be reversed if you sell your property within five years of the end of the financial year in which you took possession of it.
2. The Deductions on Stamp Duty and Registration
Stamp duty and registration fees are also eligible for a tax deduction under section 80(c) of the Income Tax Act, but they must be kept within the overall limit of Rs 1.5 lakh applied to principal repayment. Whether you take out a home loan or not, you can take advantage of this perk. Furthermore, this advantage is available only during the year in which the expenses are incurred.
3. The Deductions on Interest Paid for Construction
You can claim interest on your housing loan as a deduction after the construction is completed if you buy an under-construction property and pay the EMIs. Both pre-construction period and post-construction period interest can be deducted under the Income Tax Act. Interest on pre-construction loans is allowed as a deduction in five equal annual installments, beginning with the year the house property is purchased or erected. As a result, the total interest deduction allowed to a taxpayer under Section 24(b) is 1/5th of interest relating to the pre-construction period (if any), Plus interest relating to the post-construction period (if any).
4. Deductions on the Interest Paid
Section 24(b) allows you to deduct the interest you pay on your home loan. If you own a self-occupied house, you can claim a maximum tax deduction of Rs. 2 lakh per year from your gross income if the house is built or purchased within five years. Furthermore, in the case of a self-occupied home, the loan must be used solely for the purchase or building of the home (i.e., not for repair, renewal, or reconstruction). You can claim interest on a home loan for purchase, construction, repair, renewal, or reconstruction only up to Rs. 30,000 annually if the construction/acquisition period exceeds the required time frame.
5. A Joint Home Loan Tax Deduction
Each borrower can claim a deduction on house loan interest up to Rs 2 lakh under Section 24(b) and a tax deduction on principal payments up to Rs 1.5 lakh under Section 80C if they take out a home loan jointly. When compared to a single applicant home loan, this doubles the number of deductions possible. It is, however, needed that both applicants be co-owners of the property and that both applicants service the EMIs.
So, it all sums up the type of home loan you are taking. Also though there are terms and conditions, once you do the proper research, you will know what to do!