Home Loan Tax Benefits: How to Reduce Your Income Tax with a Home Loan

loan on Owning a home is a dream for many, and home loans often make that dream achievable. But did you know your home loan can also help you save big on taxes? Let’s dive into how you can leverage home loan tax benefits to reduce your income tax.

What is a Home Loan Tax Benefit?

In simple terms, a home loan tax benefit is a deduction you can claim on your taxable income. The government incentivizes homeownership by allowing borrowers to deduct both principal and interest payments under various sections of the Income Tax Act.

Why Are Tax Benefits on Home Loans Important?

Tax benefits not only make your loan more affordable but also allow you to channel savings into other financial goals. It’s a win-win: you build an asset while reducing your tax outgo.

If you are purchasing a home with a loan, you can claim deductions on the interest portion of your EMI payments according to the Income Tax Act, 1961.

While obtaining a housing loan can be expensive, it offers several tax benefits that can help you save on taxes each year. Understanding how to maximize these benefits is essential.

Impact of the New Tax Regime on Home Loan Benefits

1. Under the old tax regime, home loan benefits remain unchanged, allowing for deductions without restrictions. However, under the new tax regime, these benefits are limited:

2. However, Section 24(b) deductions are still available for rental properties. If the net income from a rental property results in a loss, this loss can be offset against profits from another property but cannot be set off against other income sources such as salary.

3. Deductions under Section 80C for principal repayments, stamp duty, and registration charges, as well as deductions under Sections 80EE and 80EEA, are not available.

Deductions under Section 24(b) for interest payments are not available for self-occupied properties.

Interest Deduction on Housing Loans under Section 24

To claim a tax deduction, the loan must be used for purchasing or constructing a house property. If the loan is for construction, the construction must be completed within five years from the end of the financial year in which the loan was taken.

Under Section 24, you can claim a deduction of up to Rs 2 lakh on the interest portion of your home loan EMI for the year.

From the assessment year 2018-19 onwards, the maximum deduction for interest on self-occupied properties is Rs 2 lakh.

For let-out properties, there is no upper limit for claiming tax deductions on interest, allowing you to deduct the full amount of interest paid on the home loan.

If construction extends beyond the five-year period, you can only claim a deduction of up to Rs 30,000 on the interest for that financial year.

Deduction for Interest Paid on Home Loans During the Pre-Construction Period

If you have purchased an under-construction property and are paying EMIs but have not yet moved in, your eligibility to claim a deduction on the home loan interest begins only after the construction is completed or immediately if you buy a fully constructed property.

Does this mean you won’t receive any tax benefits for interest paid between taking the loan and completing construction? Not necessarily. You can still claim these benefits, but under certain conditions and in future years.

According to the Income Tax Act, you can claim a deduction for interest paid during the pre-construction period. This pre-construction interest can be deducted in five equal installments starting from the year the property is acquired or the construction is completed, in addition to the regular deductions available for house property income. However, the total deduction remains capped at Rs 2 lakh.

For example, if you took a home loan in April 2021 and paid Rs 10,000 in interest each month, with construction completed in April 2023, you can start claiming the pre-construction interest of approximately Rs 2.4 lakh in five equal installments from the 2023-24 fiscal year. The maximum interest deduction under Section 24(b) is Rs 2 lakh, which includes both current year interest and pre-construction interest. Thus, if you paid Rs 1,20,000 in interest during the 2023-24 year, you can claim a total deduction of Rs 1,68,000 (Rs 1,20,000 for current year interest plus Rs 48,000 as one-fifth of pre-construction interest).

Additionally, if your home loan qualifies for deductions under Section 80EEA, you can claim an extra Rs 1.5 lakh beyond the Rs 2 lakh limit under Section 24(b). Details on Section 80EEA are discussed later in this article.

Deduction for interest on a Home Loan

You can avail yourself of a home loan with the sole purpose of constructing or purchasing a house. However, the construction of your house must be done within five years of the availing of the loan, your home loan has two components – principal payment and interest payment.

You can claim a deduction under your interest category of up to Rs.2 lakh under Section 24.

The maximum deduction on interest paid for self-occupied houses is Rs.2 lakh. This rule has been in effect from 2018-19 onwards.

However, if your property is a let out, then there is no limit on the interest you can claim.

However, the maximum total loss under the heading “House Property” that may be claimed is only Rs 2 lakh. From the year when the house’s construction is finished, you can claim this deduction.

Principal Repayment Deduction under Section 80C

Principal repayments on home loan EMIs can be claimed as a deduction under Section 80C, with a maximum limit of Rs 1.5 lakh per year.

However, to qualify for this deduction, the property must not be sold within five years of possession. If the property is sold within this period, the previously claimed deduction will be added back to your income in the year of the sale.

Extra Deduction under Section 80EE

An additional deduction of up to Rs 50,000 is available under Section 80EE for home buyers. To qualify for this deduction, the following conditions must be met:

The borrower must be a first-time home buyer, meaning they did not own any other property on the date the loan was sanctioned.

The loan amount should be Rs 35 lakh or less, and the property’s value should not exceed Rs 50 lakh.

The loan must have been sanctioned between April 1, 2016, and March 31, 2017.

Loss Under the House Property Head

If you have not rented out any of your house properties, you are likely to incur a loss under the “House Property” head due to the interest deductions available under Section 24(b). Even if you have rented out the property, a loss is still possible because there is no cap on home loan interest deductions, which means your interest expenses could exceed your rental income.

In either case, the maximum loss you can offset against other sources of income under the “Income from House Property” head is Rs 2 lakh per year. Any loss exceeding Rs 2 lakh cannot be set off in the current year but can be carried forward for up to 8 years and used to offset future income from house property.


You can reduce your income tax with a home loan through several tax benefits:

1. Interest Deduction: Under Section 24(b) of the Income Tax Act, you can claim a deduction of up to Rs 2 lakh per year on the interest paid for a home loan for a self-occupied property. For let-out properties, there is no upper limit on this deduction.
   
2. Principal Repayment Deduction: Under Section 80C, you can claim a deduction of up to Rs 1.5 lakh per year on the principal repayment of your home loan. This deduction also covers other eligible investments and expenses.
   
3. Additional Deduction: Section 80EE offers an additional deduction of up to Rs 50,000 on interest paid for home loans, provided certain conditions are met, such as the loan amount being Rs 35 lakh or less and the property value not exceeding Rs 50 lakh.
   
4. Pre-Construction Interest: You can claim a deduction for interest paid during the pre-construction period, spread over five equal installments, starting from the year of possession.

By leveraging these deductions, you can effectively lower your taxable income and reduce your overall tax liability.

Section 80C: Deduction on Principal Repayment

Under Section 80C, you can claim deductions of up to ₹1.5 lakhs on the principal amount you repay each year.

Eligibility Criteria for Section 80C

1. The property must not be sold within five years of possession.
2. The house should be completed (not under construction).

Section 24(b): Deduction on Interest Paid

This section allows you to claim up to ₹2 lakhs annually on interest paid for a self-occupied property.

Interest Limits Under Section 24(b)

• For rented properties, there’s no upper limit, making it especially beneficial for investors.
• For under-construction properties, interest paid during the pre-construction phase can be claimed in five equal installments post-construction.

Section 80EE and Section 80EEA: Additional Deductions

First-time homebuyers rejoice! These sections offer extra benefits:

Who Can Claim These Benefits?

• Section 80EE: Up to ₹50,000 for loans sanctioned between specific dates.
• Section 80EEA: An additional ₹1.5 lakh for affordable housing loans, applicable until a specified date.

Tax Benefits on Joint Home Loans

How Are Deductions Split?

If you’ve taken a joint loan, each co-borrower can claim deductions individually, provided they’re co-owners of the property.

Maximizing Benefits for Co-Owners

For a joint loan, the total tax savings can double. Splitting ownership and repayment responsibility smartly can help maximize benefits.

Tax Benefits for Under-Construction Properties

Pre-Construction Period Interest

Interest paid during the pre-construction phase is deductible in five equal installments after possession.

Tax Implications Post-Construction

Once the construction is completed, both interest and principal repayments become eligible for deductions under respective sections.

Conditions to Fulfill for Claiming Tax Benefits

Proper Documentation

Ensure you have a copy of the loan statement, possession certificate, and proof of payment to avoid hassles.

Timely Payments and Loan Utilization

You can only claim benefits for actual repayments made. Delays can disqualify your claims.

How to Strategically Use Home Loan Tax Benefits

Aligning Tax Savings with Financial Goals

Your home loan tax benefits can align with long-term financial goals, such as saving for retirement or funding your children’s education.

Comparing Fixed vs. Floating Interest Rates

Choosing between fixed and floating interest rates can impact your overall tax benefits. Analyze the tax-saving potential based on your loan type.

FAQs

Can I claim tax benefits if my property is rented?

Yes! You can claim tax benefits on the interest paid, and there’s no upper limit for rented properties.

Are there tax benefits for second home loans?

Yes, the deductions apply, but they’re calculated differently based on whether the property is self-occupied or rented.

What happens if I sell the house before the loan tenure ends?

Selling within five years may result in reversed benefits under Section 80C. You may need to add the claimed deductions back to your income.

Can NRIs claim home loan tax benefits in India?

Absolutely! NRIs can claim these benefits, provided they file returns in India and the loan is for a property in India.

Is there a cap on the number of years for claiming pre-construction interest?

Yes, pre-construction interest can be claimed in five equal installments after possession, with no upper limit on the tenure itself.