17 AUGUST, 2022

Income tax is one of the harshest realities every employed person must face. Every year, you must pay the tax according to your total earnings, whether you are salaried or self-employed. The worst part is the high amount that gets deducted from your earnings, leaving you with much less than what you earned. That's why everyone needs to be aware of the different ways of claiming tax exemptions and reducing the amount they must pay every fiscal year.

While there are many ways to claim deductions, you need to identify those where the tax benefits are maximum. One such workaround is the home loan, which offers outstanding tax exemption opportunities. Defined under multiple sections of the Indian Income Tax Act, you can save over one lakh with a home loan. So, if you want to know more about the income tax benefits of home loans, read the following discussion.

Section 80C: Tax exemption on the principal amount of the home loan

According to Section 80C, you can get tax benefits from a home loan up to INR 1.5 lakhs. This is not dependent on the year of payment. However, the benefit won't start until the property construction is complete. Even if you repay the loan's principal amount for the years during which construction was ongoing, the tax exemption will not be considered. Therefore, it is better to take this loan for readymade properties with complete basic construction and which you have taken possession of.

Apart from this, you must also be mindful that you will be charged GST on any under-construction property. You will be saved from this separate charge if it is already constructed.

According to Section 80C (5), you won't be able to sell the property for the next 5 years. If you do so, the tax exempted for all the years you had possession of the property will be considered taxable income. Therefore, you will be liable for paying tax on that as a surplus.

Section 24: Tax exemption on interest paid for the home loan

Suppose the home loan is taken for any residential property's construction, purchase, renewal, repair, and reconstruction. In that case, you can apply for tax exemption under Section 24 of the Indian Income Tax Act. However, instead of the principal repayment, the tax benefit will apply to the interests you will pay against the home loan as per the principal amount.

Before 2014, the budget plan mentioned that the maximum amount that can be exempted from tax under Section 24 for a self-owned property is INR 1.5 lakhs. However, the revised budget plan for 2014 had increased to INR 2 lakhs. The deduction is applicable on an accrual basis. This means that you can still get the tax benefit even if you don't pay the principal and the interest amount for a fiscal year. This is what sets the Section 24 clause apart from that of Section 80(C).

There is one limitation on the tax benefit under Section 24. If the property is not completed or you do not acquire the property within five years from the end of the financial year your home loan is dated, the tax benefit amount will be reduced to INR 30000.

Income tax benefit on a home loan during the pre-construction period

Often the home loan is granted during the construction phase of the concerned property. In this case, the credit is granted to allow you to complete the construction. But during this period, you will be liable to pay the interest and the principal amount according to the monthly calculation basis.

According to Section 24, no tax will be exempted from the interest paid during the construction phase of the home loan. There are two further conditions on income tax benefits on home loan, which are:

  1. If the loan is used for reconstruction, repair, or renewal, you won’t be able to enjoy the tax benefits.
  2. When the loan is taken for purchasing or constructing the property, the interest paid for the entire construction phase will be added and deducted from the tax amount in five consecutive financial years.
Section 80EEA: Tax benefit on interest for a home loan for first-time buyers

Section 80EEA is more beneficial than Section 80(C) and Section 24 as you will get more tax benefits. Following are the conditions when this new rule will be applicable:

  1. You will be eligible for the deductions on tax only when the stamp duty charged on the concerned property is equal to and less than INR 45 lakhs. To know more, you can use a stamp duty calculator.
  2. Also, the loan needs to be sanctioned between April 1, 2019, and March 31, 2022.
A few other informational facts on tax benefits against the home loan
  • Section 80C, Section 80EEA, and Section 24 are applicable per person. Therefore, if the property loan is taken for joint owners and if they are eligible for the taxes, deductions will be made jointly.
  • All three sections will apply when you live in a rented property and enjoy the HRA taxes.
  • If the tax rates decided under the 2020 budget plan apply to your income, you wouldn't be able to enjoy these tax benefits for all three sections.
  • Any violation of the rules and regulations will lead to penalties and higher compensation charges.
Tips to get the best home loan

i. First, you must choose the best property or plan the construction of the property you envisioned.

ii. Once done, you should make the maximum down payment to reduce the principal amount of the home loan.

iii. If your credit score is high and you meet all the eligibility criteria, you can apply for a home loan.

Conclusion

With the three sections now described in detail, you can understand how the tax benefits are calculated on your home loan. You can consult a professional if you have any queries about the tax deductions you are eligible for. Also, it is better to use the stamp duty calculator because both Section 80C and Section 80EEA include exemptions on the stamp duty for the concerned property.

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.

Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.