A Home Loan can be a great financial resource in making your dream of owning a home a reality. It also offers significant tax-saving advantages. There are two components of repaying a Home Loan, i.e., the principal amount borrowed and the interest paid.
Under Section 80C and 24(b) of the Income Tax Act of 1961, you can benefit from a tax deduction on the principal repayment amount of up to Rs 1.5 Lakh and a housing loan interest deduction up to Rs 2 Lakh. Knowing the tax benefits of a Home Loan is crucial when considering buying a home. So if you’re planning to take a Home Loan or already have one, understanding the tax benefits can help you maximise your savings.
Tax deductions on Home Loans for the term 2023-24
Following the Income Tax Act 1961, here are the tax benefits under the respective sections:
|Income Tax Act||Maximum Deductible Amount|
|Section 24||Rs 2 Lakh annually|
|Section 80C||Rs 1.5 Lakh annually|
|Section 80EE||Rs 50,000|
In the latest updates announced in the Union Budget of 2023-2024, specific extensions and exemptions were proposed to promote affordable housing:
- The eligibility period to claim an additional deduction for the interest of Rs 1.5 Lakh paid on a loan taken for purchasing an affordable house has been extended until 31 March 2022.
- The eligibility period for claiming a tax holiday for an affordable housing project has been extended by another year, with the new deadline being 31 March 2023.
- To encourage the supply of affordable rental housing for migrant workers, a new tax exemption has been proposed for notified Affordable Rental Housing Projects.
Although no significant changes have been made regarding the deductions under Home Loans, the government has allocated Rs 48,000 Crore to the Pradhan Mantri Awas Yojana (PMAY).
Tax deductions on Home Loan interest rate for the term 2023-24
If you wish to construct or buy a house, you can avail a Housing Loan with an interest deduction on it. However, you must complete the construction of the house within five years of availing the loan.
You can claim a deduction of up to Rs 2 Lakh on the interest paid under Section 24. This deduction limit has been practised since the 2018-19 financial year. However, if you rent out your property, there is no limit on the interest deduction you can claim.
It is important to note that the maximum total loss that can be claimed for a property is Rs 2 Lakh. You can start claiming this deduction once the construction of your house is completed. However, before availing a loan, ensure to calculate the EMI you will have to repay with a Home Loan Repayment Calculator.
Tax benefits on pre-construction interest for Home Loans
If you have purchased an under-constructed house and are still paying EMIs, you can only claim deductions on the interest paid. This can only be done once your house is completely constructed or you buy an entirely constructed home.
However, this does not mean that you cannot avail yourself any tax benefits during the construction period. Pre-construction interest is one such interest that can be written off under the Income Tax Act. Along with the deduction you can claim from your house property income, you can also claim a deduction in five equal instalments starting from the year the property is acquired or the construction is completed. The maximum eligible limit is still Rs 2 Lakh.
For example, if you pay Rs 10,000 as interest monthly for your Home Loan for construction, and it took two years for house construction, let’s say 2022. You can then start claiming the pre-construction interest of approximately Rs 2.4 Lakh in five equal instalments starting in 2022 (only after construction is completed). However, it is essential to note that the maximum deduction limit for interest, including current-year and pre-construction, is still restricted to Rs 2 Lakh under Section 24(b). To get an idea about the EMI and deductions, you can use a Home Loan Repayment Calculator.
Claiming tax benefits on a Home Loan can be a straightforward process if you follow these simple steps. When availing a Home Loan, calculate the amount of tax deduction you are eligible for. Furthermore, ensure that the property is registered in your name or you are a loan co-borrower.
Submit the Home Loan interest certificate to your employer to adjust the tax deductible at source. If you fail to do so, you must file the tax return yourself. If you are self-employed, you do not need to submit these documents anywhere, but it is essential to keep them handy in case the IT department raises any queries in the future.
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