Last Updated on Feb 10, 2020 by Aradhana Gotur

Owning a home is a matter of pride and achievement. However, with high rates of inflation and real estate prices, purchasing or constructing your dream home with savings alone is not easy, especially when young. That’s why an increasing number of homeowners are now availing a home loan to make their dream of owning a home come true. In fact, according to BankBazaar’s Aspiration Index 2018 and 2019, owning a home is the single most important goal of the Indian millennials.

In addition to allowing you to construct a home conveniently and paving the way to make your dream come true, a home loan also offers tax benefits. But are these really beneficial? Let us find an answer in this article. Before we begin, here is a list of the home loan tax deduction available to you under various sections of the Income Tax 1961:

These are available under various sections of the Income Tax 1961:

1.    Tax deduction for interest paid on a home loan used to buy a ready-to-move property or construct a property

The Income Tax Act, 1961 allows you to claim a tax deduction of the interest that you pay on a home loan during a financial year under Section 24b. While the maximum deduction allowed is Rs 2 lakh for a self-occupied property, there is no limit in case of let-out property. Also noteworthy is that in order to enjoy the entire limit of Rs 2 lakh, you should the construction of your home should be completed within 5 years of starting. If not, you can only claim a deduction of up to Rs 30,000. There is no such condition in case your property is let out.

2.    Tax deduction for interest paid on a home loan used to buy an under-construction property

In case your property is under construction, you can still claim tax deduction towards the interest component. However, in this case, even though you start paying EMIs, you can only claim a tax deduction after the completion of the construction. Thankfully, this condition doesn’t mean that you can’t claim the interest that you pay during the construction of the home. Called as the pre-construction interest, you can claim a tax deduction towards this amount in 5 equal instalments starting from the financial year in which the construction of the property is completed or it is acquired. The maximum deduction remains the same at Rs 2 lakh.

3.    Tax deduction for principal repayment of a home loan

In addition, the IT Act also allows you to claim a tax deduction on the principal repayment under Section 80C. The maximum you can claim under this Section is Rs 1.5 lakh, along with other deductions allowed under the head. However, this is one condition that applies to claim the deduction: you shouldn’t sell the property within 5 years of occupying it. Else, the principal deduction will be added to your income in the financial year of sale of the property and taxed accordingly.

4.    Tax deduction for the registration charges and stamp duty

Besides, you can also claim a tax deduction towards the registration charges and stamp duty under section 80C. However, the deduction amount is subject to the overall limit of Rs 1.5 lakh; also, you can only claim the charges in the year in which you incurred them.

5.    Additional tax deduction for first-time homeowners

If you are a first-time homeowner and have availed a home loan, you are in luck. This is because, barring the above tax deductions, you can also claim an additional deduction of up to Rs. 50,000 under Section 80EE. The condition to avail this deduction are:

  1. The value of your home loan amount shouldn’t exceed Rs 35 lakh
  2. The value of your property shouldn’t be equal to or less than Rs 50 lakh
  3. The lender should have sanctioned your home loan during 1st Apr 2016 to 31st Mar 2017
  4. As on the date of the sanction of your home loan, you shouldn’t have owned any home

6.    Additional tax deduction under section 80EEA

In addition to the above home loan tax deductions, the Budget 2019 has also declared an additional deduction of up to Rs 1.5 lakh under Section 80 EEA subject to the following conditions:

  1. The stamp value of your property should be equal to or less than Rs 45 lakh
  2. The lender should have sanctioned your loan during 1st April 2019 to 31st March 2020
  3. As on the date of granting the loan, you shouldn’t have owned a house property
  4. You shouldn’t be eligible to claim a tax deduction under section 80EE

7.    Tax deduction for a joint home loan

In case you have availed the home loan jointly, then each of you can claim a tax deduction for interest payment and principal repayment. However, both you and your co-borrowers should be co-owners of the property. The tax deduction, in this case, is up to Rs 2 lakh for interest and up to Rs 1.5 lakh for the principal under Section 24b and Section 80C, respectively.

When are home loan tax deductions not beneficial?

Though these tax benefits can help you save and reduce your cost of credit to an extent, their effectiveness depends on various factors. Sample these scenarios to understand when home loan tax deductions may not be beneficial to you.

1.    When you avail home loan solely to enjoy for tax benefits

You can save tax in many ways and availing a home loan is one of them. However, if you fall under the highest tax slab and avail a home loan primarily to claim tax benefits, you may end up spending more towards interest rather than enjoying any real benefit from the tax deductions. The reason is simple: instead of using your ability to prepay or foreclose your loan, you choose to keep it open for a longer tenor to claim tax deductions. As a result, your cost of borrowing increases, which defeats your purpose of boosting your savings.

2.    When you don’t pay higher EMIs after receiving a hike in income

Every year, you may receive a hike in your income. Though most of it is eaten away by inflation, you will still have some additional income as compared to the last year. A smart way to use this extra income is to increase your home loan EMIs. Doing this will help you close your loan before the tenor ends, which, in turn, results in interest savings. Failing to do so solely for tax purposes will, on the other hand, result in higher interest charges.

3.    You have exhausted the overall limit of deduction under Section 80C

Section 80C is quite tax-friendly as it allows you to claim a tax deduction for investing in various investments and making certain expenses. However, the maximum deduction you can claim under this section is Rs 1.5 lakh, which may not be enough to accommodate all your deductions. To understand better, sample this:

Investments/ExpensesRs Amount
Public Provident Fund50,000
Employee’s Provident Fund25,000
Unit Linked Insurance Plan20,000
National Saving Scheme10,000
Home loan principal deduction45,000
Total deduction available under Section 80C1,50,000

From the above table, you can see that after claiming all your eligible investments under Section 80C, you may only be left with Rs 45,000 for home loan principal repayment. Therefore, extending your home loan tenor or ignoring investing in tax-saving investments for home loan tax benefits will not do you much good. Not only will you incur higher interest on home loan and lose the returns you could otherwise earn from tax-friendly options, but you also end up adding to your cost of borrowing over time.

But these may not be the only considerations you’d want to make after Finance Minister Nirmala Sitharaman announced the Union Budget 2020. Here’s why.

Budget 2020 proposals relating to a home loan

Nirmala Sitharaman presented the Union Budget 2020 on the 1st of Feb this year and made two proposals regarding home loan tax benefits. However, both are contradictory in nature and so, may demand more than just simple consideration to decide the effectiveness of the tax benefits available for a home loan. Take note of the proposals.

Extension of tax deduction available under Section 80EEA

As mentioned earlier, Budget 2019 had introduced an additional tax deduction of Rs 1.5 lakh under Section 80EEA towards interest paid on a home loan. The deduction was available only for home loans availed in the FY2019-20. Now, Budget 2020 has proposed to extend the period for which the deduction is available under the section by a year. This development allows you to claim the tax deduction under Section 80EEA for a home loan that you avail in the financial year 2020-2021 also.

New tax regime to abolish exemptions available under Section 80C and Section 24b

As is known, Budget 2020 has proposed a new tax regime, which the finance minister says, would help in simplifying taxes. As against the old tax regime, the new one has seven income tax slabs. Though you have an option to choose between both the tax regimes to calculate your tax liability, the new tax regime has a catch. It requires you to let go of over 70 tax exemptions out of the 100 that are available now. Besides, the Budget has signalled to gradually remove all the exemptions that are currently available. So, if you choose the new tax regime, you would not get to claim the tax deductions of Rs 3.5 lakh (Rs 1.5 lakh towards principal and Rs 2 lakh towards interest under Section 80C and 24b, respectively)

Now, the effectiveness of tax benefits not only depends on your unique situation, but also the tax regime you opt for. So, ensure to do a cost-benefit analysis and choose a suitable tax regime, in order to enjoy optimum savings.

Aradhana Gotur