Tax benefits on home loans: Fact or myth?

Homeownership is a cherished dream for many, a dream that signifies stability, comfort, and a sense of belonging. As James Allen once said, "The home should be the treasure chest of living." In today's financial landscape, home loans have become the key to unlocking this treasure, making the journey to owning a home more attainable than ever before.

Beyond simply making homeownership attainable, home loans also promise significant tax advantages. But, are these tax benefits substantial, or are they merely myths? Let's delve into the details.

Understanding home loan components

Before we explore the tax benefits that homeownership may provide, it is important to understand how they come into play. It begins with the understanding of how a home loan works. A home loan comprises two primary components:

• The principal amount
• The interest

The tax benefits associated with home loans apply differently to these components and fall under various sections of the Income Tax Act.

Section 80C: Tax deduction available on the principal repayment amount

Section 80C of the Income Tax Act provides a tax deduction on the principal amount of the home loan repayment. This section also includes deductions for registration and stamp duty charges incurred during the property purchase. The maximum deduction allowed under Section 80C is ₹1.5 lakh in a financial year.

However, this limit encompasses other investment options like ELSS funds, PPF, and tax-saving fixed deposits, meaning the combined deduction for all these investments, including the home loan principal repayment, cannot exceed ₹1.5 lakh.

Section 24(B): Tax benefit on interest payment

Under Section 24(B), tax is deducted on the interest component of the home loan. This deduction can be availed on loans for purchasing, constructing, or renovating a house. For self-occupied properties, the maximum deduction is ₹2 lakh per annum.

However, there is no upper limit on the interest deduction on a rented property. The prepayment and processing charges are also deductible under this section.

Section 80EE: Applicable to first-time homebuyers

First-time homebuyers are eligible to claim further tax rebates under Section 80EE. This benefit exceeds the deductions available under Sections 80C and 24(B). Under this section, first-time homeowners are eligible for a deduction of up to ₹50,000 on interest payments. However, there is one condition. The home loan amount should not exceed ₹35 lakh and the value of the property should be under ₹50 lakh.

Tax rebates on home loans at a glance

Joint home loan deductions

A home loan taken jointly allows co-owners to claim individual tax deductions. Each co-owner can claim deductions on the interest component and principal repayment.

This means that when a loan is applied for jointly, each owner can deduct up to ₹2 lakh on the interest paid on the home loan under Section 24(B).

Similarly, under Section 80C, each co-owner can deduct up to ₹1.5 lakh on principal repayment. Such an arrangement would double the tax benefits available for every co-owner independently making these deductions, provided all the stipulated conditions are met.

Consider this - Rohit and Brinda Sharma, a couple, are co-owners of a property in Kalyan, on the outskirts of Mumbai. If they jointly apply for a home loan, the interest component would be available up to ₹4 lakh, and the principal repayment would be up to ₹3 lakh in tax deductions. This will boost individual tax savings for both Brinda and Rohit. Joint home loans thus present an attractive financial strategy for many borrowers, who can afford to take joint home loans.

Some additional considerations:

Evaluating tax benefits on home loans

The Income Tax Act of 1961 incorporates specific provisions designed to encourage homeownership by offering financial relief to borrowers. These tax advantages can reduce the overall cost of home ownership substantially, making home loans an attractive financial option for many individuals.

However, it is essential to understand that these benefits come with specific conditions and limitations. The deductions are subject to the borrower's compliance with the prescribed rules, and the overall benefit depends on individual financial circumstances, including other investments and the income tax slab applicable to the borrower.

Choosing the right lender

Given the complexities of home loan tax benefits, selecting a reputable lender who can provide detailed guidance on the applicable tax laws is crucial. A well-informed lender can help borrowers maximise their tax benefits and make the most of their home loan.

Tax saving: A possibility with home loans

Tax benefits on home loans are a reality, offering significant financial relief to borrowers. Consulting with a tax consultant or financial advisor is often the best way to understand these benefits fully. These professionals provide personalised advice, ensuring that homeowners maximize their tax savings and make the most informed financial decisions.

With a clear understanding of the different sections of the Income Tax Act applicable to home loans, homeowners can effectively reduce their overall tax liability and make informed investment decisions. Therefore, having a roof over one's head does not just instill a sense of pride and security, but also provides the perks of reducing one's overall tax burden.