Know How to Save Tax on Your Home Loan This Financial Year

Owning a home is a significant milestone, and your home loan isn't just a financial arrangement, rather it's also a gateway to significant tax savings.

In India, understanding the home loan tax benefits can significantly impact your financial planning. From deductions on interest payments to benefits on principal repayments and additional perks for first-time buyers, the tax laws offer several options for homeowners to reduce their tax burden.

By taking advantage of these benefits effectively, you not only fulfil your dream of homeownership but also optimise your tax liability. Read this blog post to understand the complexities of home loan tax benefits in 2024 and learn how to make the most of them to secure your financial future.

Do Home Loans offer Tax Savings?

Yes, home loan in India offer tax savings through deductions on interest and principal repayments. Under Section 24(b) of the Income Tax Act, homeowners can claim up to Rs 2 lakh annually on interest paid for self-occupied properties, with no limit for rented properties. 

Additionally, Section 80C allows a maximum deduction of Rs 1.5 lakh per annum on principal repayment, along with other related expenses. First-time buyers can avail of an extra Rs 50,000 deduction under Section 80EE. However, certain conditions apply, such as property value and loan amount limits. Understanding and meeting these criteria is essential to maximise tax benefits.

Tax Deduction on Interest Paid

A major lucrative tax benefit of a home loan is the deduction available on the interest paid. Under Section 24(b) of the Income Tax Act, you can claim a deduction on the interest component of your home loan repayment. While residing in the property, you can claim a deduction of up to Rs 2 lakh on the interest paid annually.If you have rented out the property, you can claim the entire interest on the home loan as deduction. This deduction can significantly reduce your taxable income, easing your financial burden.

Tax Deductions on the Principal Amount

In addition to the interest deduction, you can also avail home loan tax benefits on the repayment of the principal amount. Section 80C of the Income Tax Act allows you to claim a deduction on the principal repayment of your home loan. It includes expenses such as registration fees and stamp duty (claimed only in the year of expense). The maximum deduction allowed under this section is Rs 1.5 lakh. However, it's essential to note that if you sell the property within five years of possession, the tax benefit will be reversed and added to your taxable income.

Tax Deduction for First-Time Buyers

Now, if you are a first-time homebuyer, you are in luck! Section 80EE of the Income Tax Act offers an additional deduction on the interest paid over and above the Rs 2 lakh limit. This deduction is capped at Rs 50,000 per financial year and is available until the loan is fully repaid. Certain conditions must be met to qualify for this benefit, such as:

The house's value should be at most Rs 50 lakh, ensuring eligibility for the deduction.

The loan amount should be within the limit of Rs 35 lakh, aligning with the prescribed conditions.

On the date of sanction, you must not possess any other house, ensuring first-time buyer status.

The loan should be sanctioned by a recognised financial institution or housing finance company, ensuring compliance with regulatory standards. 

The loan should be sanctioned between 1st April 2016 to 31st March 2017.

80EE deductions are only available in the old tax regime.

Meeting these criteria ensures eligibility for the additional deduction, enhancing the benefits of homeownership for first-time buyers.

How to Use These Tax Deductions to the Fullest?

Consider opting for a joint home loan if both partners are employed. Doing so enhances loan eligibility and boosts combined tax benefits. With a joint loan, both partners can collectively claim up to Rs 3 lakh in deductions on the principal amount under Section 80C. The total tax deduction for interest repayment under Section 24 increases to Rs 4 lakh from Rs 2 lakh and Rs 50,000 each under Section 80EE. This approach optimises tax savings, making it a smart choice for couples using available deductions to the fullest.

Conclusion 

Your home loan offers many tax benefits that significantly reduce tax liability and enhance financial well-being. By effectively understanding and leveraging these benefits, you can maximise your investment while securing your future. You can also plan your future investment accordingly by ensuring you avail the deductions. So, whether you are a first-time buyer or an experienced investor, ensure you capitalise on your home loan's tax-saving opportunities.