When you take a home loan in India, the interest on your home loan becomes eligible for deduction under Section 80C of the Income Tax Act. This means you can claim a tax deduction up to Rs. 2 lakhs on your home loan interest if you are an individual taxpayer.
There are various property investment schemes through which you can save taxes. However, the best method to save on taxes is by taking a home loan and investing in property.
Though it may sound surprising, taking a home loan has the potential to save a hefty sum of taxes that are otherwise payable after selling your property.
Let us dive in further to know more about home loan tax benefits.
Home Loan In India
A home loan is a debt; you must pay it off with interest. When you take a home loan, your monthly repayment includes principal and interest. The principal of the loan is the amount borrowed by you, while the claim is the cost of borrowing.
The goal of the home loan can vary from purchasing a house or investing in the construction of a new place.
So how do you avail of the home loan tax benefit?
The answer lies in what the loan repayment amount includes: interest and principal.
If you apply and get a loan of Rs 50 lakh and the tenure of the loan is 20 years, then the repayment would be Rs 1 lakh per month. While paying this amount to the bank, you can claim a tax deduction under Section 80C of the Income Tax Act 1961 (IT Act).
Section 80C gives you a maximum Rs 1.5 lakhs deduction from your taxable income in any financial year.
So if your annual taxable income is Rs 10 lakhs, then Rs 1.5 lakhs will be deducted from this amount and added to your total income for that year. Next year, you can also claim another Rs 1.5 lakhs under Section 80C if your taxable income remains the same or increases marginally but does not exceed 25% of your total income from all sources during that year.
Tax Deduction on Home Loan
Tax deduction on a home loan is if your salary is above Rs. 15 lakhs a year. In such cases, buying a house will help you save on taxes.
The interest component in the EMI that you pay will be tax-free. The interest component is an expense towards your loan, not your house purchase.
The principal of the EMI for the home loan will be included in your taxable income. This is because it is an expense towards your loan, not your house purchase.
However, if you are buying a house, then the principal component of your home loan EMI will also be tax-free.
That’s because the main element of your home loan EMI would be towards the cost of buying a house and hence qualifies for deduction under section 80C of the Income Tax Act.
Tax Benefits Under Section 80C
Housing loans are among the most significant tax benefits available under Section 80C. If you take a home loan from any bank or an NBFC (non-banking financial company), you can claim a tax deduction on your interest and principal payments made during that year.
As per the Income Tax Act, you can claim a deduction of Rs 1.5 lakh on the home loan’s principal to be repaid in a financial year.
The interest paid on your home loan is capped at Rs 2 lakhs per annum, so if you have taken a bigger loan than this, you can claim only up to Rs 2 lakhs as a deduction under Section 24 of the Income Tax Act, 1961.
One of the significant factors to remember so that you can avail of the home loan tax benefit is that you cannot sell the property for the next five years.
Wrapping Up
Home loans are tax deductible in India under section 80C of the Income Tax Act, 1961. It is one of the famous investment avenues for Indian taxpayers to save taxes. To avail of the benefit from this deduction, you need to be aware of all the aspects of the home loan and the tax-saving advantages available.
