Home Loan Tax Benefits in India – How to Get Income Tax Benefits on Your Home Loan

Home buyers in India are mostly dependent on loans to construct and buy their homes. These loans have two components while these are being repaid first is the principal, and the other is the interest payment. Individuals can avail of home loan tax benefits on both of these components. 

It is important to learn how home loan and tax benefits work to maximize your savings and avail the full benefits. This article provides insights into the workings of tax benefits in home loans. 

Tax Benefits on Home Loans

The tax benefits can be divided as per the old regime and the new regime, and taxpayers can choose only one of these. 

Old Regime 

Under the old regime, taxpayers get tax benefits for repayment of the principal amount, interest amount, and additional benefits for first-time home buyers. All these benefits fall under different sections. The sections for tax benefits in home loans are explained as follows: 

1. Section 80C: Principal Amount

• Under section 80C, taxpayers can claim a deduction of up to Rs.1,50,000 on the principal amount that is being repaid for the home loan. Stamp duty and registration charges can also be deducted under section 80C, but only in the financial year in which these are being paid. 
• The house must not be sold within five years of purchase, else all the tax deductions will be added back to the income and will be taxed. 
• The deductions can be claimed after the construction of the house is completed. 

2. Section 24(b): Interest Amount 

• This section provides an exemption of up to Rs. 2,00,000 for interest paid on the EMI for a self-occupied property. 
• If an individual pays an EMI on the property that has been rented out, then the EMI paid for that property can be fully claimed as a deduction. 
• The construction of the house must be completed within five years after the end of the financial year in which the loan is availed. If construction takes longer than that, then the exemption allowed is only Rs. 30,000. 
• These home loan tax benefits can only be claimed when the construction is completed. However, pre-construction interest can also be claimed after the construction is completed. In this case, the interest paid during the construction is divided into five equal parts and can be claimed. This amount is within the Rs. 2,00,000 limit. 

3. Section 80EE: Additional benefits for First-Time homebuyers 

• If the individual does not own any property previously. Then, they receive a further exemption of Rs. 50,000 under Section 80EE. 
• To avail of this exemption, the loan amount must be less than Rs 35 lakhs, and the property value must be less than Rs. 50 lakhs and loan must be sanctioned in FY17, meaning, 1st April 2016 to 31st March 2017. 

4. Section 80EEA: Additional Benefits for First-Time Homebuyers 

• If a first-time home buyer is not eligible for exemptions of section 80EE, then they can get an exemption of up to Rs. 1,50,000 under section 80EEA. 
• This benefit can only be availed if the property is purchased between 1st April 2019 and 31st March 2024 and the stamp value of the property is equal to or below Rs. 45 lakhs. 

5. Home Loan Taken Jointly 

• When a loan is availed with a co-owner of the property, then each of them can claim deductions as per Section 80C (principal amount) and Section 24(b) (interest amount). 
• These deductions are available in the share of ownership of the property. So, it can be beneficial for homeowners to add their family members or friends as co-owners and claim these deductions. 

New Regime

The new regime is a little simpler than the old regime as it removes nearly all the home loan tax benefits from the old regime except a few. The provisions of the new regime are as follows: 

• Tax benefits in home loans such as – Section 80C, Section 24(b), Section 80EE, and Section 80EEA are removed entirely. These deductions cannot be claimed under the new rules. 
• The benefit of Section 24(b) is still available for rented-out properties (it has been removed for self-occupied properties). If the interest paid on a rented-out property is higher than the rent received, then this loss can be offset against income from another house property. But it cannot be offset against salary or business income. 

Which regime should you choose? 

A taxpayer has a choice between the new and the old regime. If someone has a home loan, it can be beneficial to choose the old regime and claim the tax benefit in home loans. (By choosing the old regime, an individual will be taxed as per old slabs) 

For example, assume an individual has an existing home loan the following details: 

• An individual has an annual income of Rs. 12,00,000.
• His total payment towards the home loan for the year is Rs. 4,50,000, split as:
  • Rs. 2,50,000 towards interest
  • Rs. 2,00,000 towards principal amount
• The house construction was completed before he acquired it.
• He is not a first-time home buyer.
• The house was not purchased between FY20 and FY22.

Now, let us find out the tax liability of the individual under the new and old regimes. 

Tax under the Old Regime 

Component	Amount (Rs)
Gross income	12,00,000
Less: Deduction under section 80C (Max: 1,50,000)	(1,50,000)
Less: Deduction under section 24(b) (Max: 2,00,000)	(2,00,000)
Less: Standard deduction	(50,000)
Net taxable income	8,00,000

The net taxable income for the individual is Rs.8,00,000, so let’s calculate the tax liability of the individual. 

Income tax calculation on Rs.8,00,000 (old rules)	Amount (Rs)
Up to 2,50,000	Nil
Rs.2,50,000 – Rs.5,00,000 (5% above 2,50,000)	12,500
Rs.5,00,000 – Rs.10,00,000 (20% above 5,00,000)(20% of Rs.3,00,000)	60,000
Tax Liability	72,500
Health and Education cess (4% of Tax liability)(4% of 72,500)	2,900
Total tax liability	75,400

As per the old rule, after all the deductions, the individual’s tax liability stands at Rs. 75,400. Now, let’s calculate the tax liability as per the new rules.

Tax Under New Regime

If the individual selects the new rules, individuals do not get deductions under the section 80C, section 24(b), section 80EE, or section 80EEA, so their tax liability calculations will be as follows: 

Component	Amount (Rs)
Gross income	12,00,000
Less: Standard deduction	(75,000)
Net taxable income	11,25,000

The net taxable income for the individual is Rs.11,25,000, so let’s calculate the tax liability of the individual. 

Income tax calculation on Rs.11,25,000 (new rules)	Amount (Rs)
Up to 3,00,000	Nil
Rs.3,00,000 – Rs.7,00,000 (5% above 3,00,000)	20,000
Rs.7,00,000 – Rs.10,00,000 (10% above 7,00,000)	30,000
Rs.10,00,000 – Rs.12,00,000 (15% above 10,00,000)(15% of 1,25,000)	18,750
Tax Liability	68,750
Health and Education cess (4% of Tax liability)(4% of 72,500)	2,750
Total tax liability	71,500

In this scenario, even though the individual claimed certain deductions in the old regime, their tax liability is still higher due to higher tax rates. In the new regime, even after claiming no deductions, their tax liability is lower due to lower tax rates. 

Before choosing whether to opt for a new or old regime, individuals must calculate the tax outflow in both regimes and choose the one where the tax outflow is less. 

Conclusion 

Home loan and tax benefits are important to understand for maximizing tax savings. According to the old tax rules, individuals can claim deductions for the interest and principal component of the home loan EMI. But, the tax rate is very high according to old rules. Although the new rules do not provide these deductions, the tax rate is lower. It is advisable to calculate the tax liability in both regimes and choose the one with lower tax outflow. Are you willing to start your investment and learning journey? Download the Powerup’s Financial Planning app today!