The Income Tax Act, 1961 allows you to save money if you have taken a home loan for purchasing or constructing a house. You can enjoy a tax exemption for a home loan from banks and NBFCs on both the principal and the interest paid.
You can receive home loan tax benefit under these two sections mentioned below. Take a look at both of these two sections i.e: section 80C and section 24.
Section 80C of the Income Tax Act, 1961 allows income tax benefits of up to Rs. 1.5 Lakh per financial year.
Under this section, you can claim income tax benefits on the following:
- Home loan principal
- National Savings Certificate (NSC)
- Sukanya Samriddhi Yojana
- Life Insurance premium
- Equity Linked Saving Scheme (ELSS)
- Unit Linked Insurance Plan (ULIP)
- Senior Citizens Savings Scheme (SCSS)
- Public Provident Fund (PPF)
- Tax Saving Fixed Deposits (5-Year Fixed Deposits), etc.
As mentioned above, Section 80C provides tax benefits only on the home loan principal. The section also allows benefits on stamp duty, and registration fees even if you have not taken a home loan.
You must make the claims in the same year as these payments. For example, you can claim tax deductions in FY 2018-19 if you paid the same in 2018.
However, you have to fulfill some conditions to avail a tax exemption for a home loan on the principal:
- You have to complete the construction or purchase of your house within 5 years of availing the home loan.
- You must remain in possession of your house for at least 5 years to make a claim. If sold, the deductions previously availed will be added to your sale price.
Section 24 of the Income Tax Act, 1961 allows tax benefits in the following cases:
- Standard Deduction
The standard deduction is set at 30% of the Net Annual Value. It is calculated as the Gross Annual Value minus the taxes.
The Gross Annual Value (GAV) is further calculated as the total rent received if you have rented out the property.
- Deduction on the Home Loan Interest
You can claim a tax exemption for a home loan on the interest paid. The total claim that can be made under this section is Rs. 2 Lakh on the total sum of interest. You can claim this benefit even when your property is under construction.
You have to meet the following conditions to avail tax benefits under this section:
- Your property has to be self-occupied.
- You cannot claim this exemption if you have utilized a home loan to reconstruct or renovate your home.
- Purchase or construction of your property has to be completed within 3 years.
The benefits come down to Rs. 30,000 if you fail to complete the construction or purchase within 5 years.
There is no limit for deductions if your house is rented out or deemed rented out. Also, you can avail tax benefits of Rs. 2 Lakhs if you cannot live in your property for occupational reasons.
The tax benefits under this section are provided on an accrual basis. Hence, you have to make the claims per year throughout the loan tenor. Also, you can avail the deduction even if you have not made any payments towards the loan.
Both the home loan tax exemption and deductions under Section 80C and 24 are available to joint owners. However, both these parties have to be co-borrowers of the loan and co-owners of the property.
Overall, these two sections provide ample opportunities you to save tax when you take a home loan.