Before we start we would like you to know that the government of India encourages housing loans to a certain degree. Hence, by availing a Home Loan you would leverage many tax benefits.
Here are five considerable tax deductions on a Home Loan:
Deduction for Interest Paid on Housing Loan
You should take a home loan to purchase or construct a house, the construction of the house must be completed within 5 years from the end of the financial year in which loan was taken. If you would pay EMIs for the housing loan, you need to understand that it has two components: a) Interest payment and b) Principal repayment.
The interest part of the EMIs paid for the year can be claimed as a deduction from your total income up to Rs 2 Lakh under Section 24.
The deduction for interest paid on self-occupied house property is Rs 2 Lakh maximum. There is no upper limit for claiming interest on let out property. But the overall loss you can claim under the head of house property, which is restricted to Rs 2 Lakh only.
You can claim this deduction from the year in which construction of the house is completed.
Deduction on interest paid towards home loan during the pre-construction period
Let’s say you bought an under-construction property and have not moved in yet but you are paying the EMIs. In this case, the deduction would begin only upon completion of construction or immediately, if you buy a fully constructed property.
So would it allow you to enjoy tax benefits on the interest paid during the period meanwhile you take the loan and the completion of the construction? No. Allow us to define why.
You can claim the pre-construction interest, as a deduction in five instalments.
The instalments starting from the year in which the property is acquired or construction is completed, over and above the deduction, or else you are eligible to claim from your house property income. Although, the maximum eligibility remains at Rs 2 Lakh.
Deduction on principal repayment
Under section 80C, you can claim a deduction on the principal portion of the EMI paid for the year. The maximum amount to be claimed is up to Rs 1.5 Lakh. Although, you cannot sell your house property within five years of possession in order to claim this deduction.
In another case, you would not be able to claim the deduction as that will be added to your income again at the end of the year.
Additional deduction under section 80EE
An additional deduction is allowed for individuals buying a home for up to Rs. 50,000 at max. You can claim this deduction on the loan amount that should be Rs 35 Lakhs or less, and the value of the property should not be more than Rs 50 lakh.
Additional deduction under section 80EEA
The 2020 budget has extended deduction available under Section 80EEA to the financial year 2021. Initially, the maximum amount for home buyers is up to Rs 1.5 Lakh. To claim this deduction, the stamp value of the property must not exceed Rs 45 Lakh.
These are some of the most crucial tax deductions that you can claim after availing a Home Loan. Hope this information would suffice.
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