Home-loan tax rules explained: Deductions, sections and proof required

A home loan does more than help a buyer purchase property. It can also lower the tax outgo. To encourage home ownership, the government offers a range of tax deductions on home-loan repayment. These benefits depend on the component being repaid, the type of property, and the tax regime chosen by the borrower.

Home-loan tax deductions: The basics

A home-loan Equated Monthly Instalment (EMI) has 2 parts:

• principal
• interest

These two components are eligible for deduction under different sections of the Income Tax Act.

 

Tax treatment also depends on the regime chosen by the taxpayer:

• old tax regime
• new tax regime

Home-loan tax benefits under the old tax regime

Deduction on principal repayment

Section 80C

 

Under Section 80C, a borrower can claim up to ₹1.50 lakh in a year as deduction on repayment of the principal component of a home loan. However, this is part of the overall Section 80C limit of ₹1.50 lakh, which also covers instruments such as Public Provident Fund (PPF), Equity Linked Savings Scheme (ELSS), life insurance premiums, National Savings Certificate (NSC) and children’s tuition fees.

 

This deduction is available only to individuals and Hindu Undivided Families. Companies, Limited Liability Partnerships (LLPs) and other entities cannot claim it.

 

Conditions

• The borrower must be an individual or a Hindu Undivided Family.
• The loan must be taken for purchase or construction of a property.
• The property may be self-occupied, rented or deemed to be rented.
• Deduction can be claimed only on the amount actually repaid during the year.
• Note: If the loan is taken for construction, the work must be completed within 5 years of taking the loan. Also, the house should not be sold within 5 years of possession.

Deduction on interest payment

Section 24

Deduction on the interest component of a home loan can be claimed under Section 24. The limit depends on the nature of the property and the purpose of the loan.

 

Up to Rs 2 lakh a year: A borrower can claim up to ₹2 lakh in a year if:

• the property is self-occupied
• the loan was taken on or after April 1, 1999
• the house is purchased or constructed within 5 years of taking the loan

Up to Rs 30,000 a year: A borrower can claim up to ₹30,000 in a year if the loan is used for repairs or renovation.

 

Entire interest paid in a year: For a rented property, the entire interest paid during the year can be claimed as deduction. This is allowed whether the loan is taken for purchase, construction, repair or reconstruction.

 

Note: Buyers may claim deduction even if the loan has been taken from family members or friends.

Additional deduction for first-time buyers

Section 80EE

Section 80EE was introduced for first-time homebuyers. It allows a deduction of up to ₹50,000 on home-loan interest, subject to conditions. Here, interest includes service fee, processing fee and other charges linked to the borrowing. This deduction is available over and above the benefit under Section 24.

 

Conditions

• The borrower must be a first-time homebuyer and should not own any residential property when the loan is sanctioned.
• The deduction is available only to individuals.
• The property value must not exceed ₹50 lakh.
• The loan amount must not exceed ₹35 lakh.
• The loan must be sanctioned by a bank or housing finance company.
• The loan must have been sanctioned between April 1, 2016, and March 31, 2017.
• The deduction applies only to residential property.
• An interest certificate is required.

Additional deduction for first-time buyers

Section 80EEA

Section 80EEA was introduced in the 2019 Union Budget to support affordable housing and give a push to the Pradhan Mantri Awas Yojana. It allows a deduction of up to ₹1.50 lakh on the interest component, over and above the benefit available under Section 24.

 

Conditions

• The borrower must be a first-time homebuyer and should not own any residential property when the loan is sanctioned.
• The deduction is available only to individuals.
• The property value must not exceed ₹45 lakh.
• The loan must be sanctioned by a bank or housing finance company.
• The loan must have been sanctioned between April 1, 2019, and March 31, 2022.
• The loan must not be taken for reconstruction, repair or maintenance.
• The deduction can be claimed only by the person who actually pays the interest.

Home-loan tax benefits under the new tax regime

Deduction on let-out property

Section 24(b)

Under the new tax regime, most home-loan deductions are not available. However, a borrower with a let-out property can still claim deduction on the entire interest paid under Section 24(b).

 

Documents required to claim home-loan tax deductions

Borrowers should keep the following documents ready:

• Interest certificate: Issued by the lender, this shows the total principal and interest repaid during the financial year. It is required for claims under Sections 24 and 80C.
• Possession or completion certificate: Home-loan tax benefits can usually be claimed only after possession.
• Loan sanction letter: This confirms the loan amount, tenure and interest rate.
• Repayment proof: Bank statements or EMI receipts showing the actual repayment made during the year.
• Property ownership documents: Sale deed or agreement, especially important in case of joint loans.
• Rental agreement: Required if the property is let out and the borrower is claiming full interest deduction.
• Municipal tax receipts: Needed if deduction on property tax is being claimed for a let-out property.
• Co-owner declaration: In joint loans, this helps establish the share of each co-borrower.
• Self-declaration for self-occupied property: Often required by employers for Tax Deducted at Source (TDS) adjustment.

Common mistakes borrowers make while claiming tax benefits

• Missing pre-construction interest claims: Interest paid before possession can be claimed in 5 equal instalments after completion. Many borrowers either miss this benefit or are unaware of it.
• Ignoring co-borrower benefits: Where there are co-borrowers, each may claim deduction separately, subject to conditions. Many fail to split the claim properly and lose out on the maximum possible benefit.
• Claiming the full deduction in a joint loan: Some borrowers claim the entire deduction themselves instead of doing so in proportion to ownership and repayment share.
• Not checking eligibility under the new tax regime: Many borrowers assume home-loan deductions continue under the new tax regime. In reality, most of these benefits are not available there.
• Mixing up self-occupied and let-out rules: The tax treatment of self-occupied and rented properties differs, particularly in the case of interest deduction limits.
• Poor documentation: Missing interest certificates, possession proof or repayment records can result in incorrect claims or rejection during assessment.

FAQs

Which sections usually apply to a home loan?

Taxpayers servicing a home loan may claim deductions under Section 80C, Section 24, Section 80EE and Section 80EEA, depending on eligibility.

Can both co-borrowers claim the tax benefit?

Yes. Both co-borrowers may claim tax deductions separately, provided both are also co-owners and both contribute to the EMI payment.

What document should be kept ready while filing the return?

The interest certificate issued by the bank is the key document. It serves as proof of annual repayment and is the basis for claiming tax deductions on a home loan.

What mistakes can lead to denial or misreporting of deduction?

Borrowers should be clear about the section under which they are claiming deduction and ensure all conditions are met. They should also keep supporting documents ready for every claim.