In India, buying a home is one of the most significant decisions in an individual’s life as buying or building a home is a dream come true for many. People usually plan and save money for years to turn this dream into reality. On the other hand, many also take a home loan to fulfil this dream.

However, as they say, with big dreams, comes big responsibility, and a new home is no exception. Understanding and paying taxes is one such responsibility that you cannot shrug off, particularly if you have taken a home loan.

Let’s take a look at the various aspects of a home loan and how you can claim tax deductions:

What comprises a home loan? 

In simple terms, a home loan is a sum of money that is borrowed from a bank or a money-lending financial institution to buy a plot of land or a flat/house. It comprises of a principal amount and an interest. You can also take a home loan to repair or make extensions or renovations to your current home.

There are different types of home loans like home purchase loan, home construction loan, home improvement loan, joint home loan, home extension loan, top-up home loan, etc. All home loans have an adjustable or fixed interest rate that is required to be paid within the stipulated time. Failure to pay the amount within the set timeframe might lead the lender (the bank or financial institution) to take over the property in question and sell it in order to recover the outstanding loan amount.

Can I get a home loan without ITR?

Most banks and lenders ask ITR as proof of income in order to approve the loan amount. However, some lenders and NBFCs that offer unsecured loans do not require borrowers to submit their ITR. 

Is home loan good for tax benefit?

So, if you are planning to buy a home, land or renovate your existing home, you must already be exploring the various loan options available with different banks and lenders. However, there is an essential aspect that you must not ignore – the taxation part.

You need to be fully aware of the various sections for home loan taxation so that you know how much you need to spend and how much you can save with a house loan. The Indian Income Tax Act enables borrowers to enjoy tax benefits on both the principal amount and the interest as well. 

How much of a home loan is tax-deductible?

Under Section 24 of the IT Act, you can enjoy tax deductions up to Rs. 2 lakhs on the interest amount. However, these deductions are applicable only on those new properties that have their construction finished within 5 years. If the construction isn’t completed within 5 years, you can claim an amount up to Rs. 30,000 only. If the property has been constructed to be put out on rent, the entire interest on the home loan qualifies for a deduction. 

Section 80C: Many people frequently ask ‘Is home loan interest a part of 80C?’ With Section 80C of the IT Act, you can claim a maximum tax deduction of up to Rs. 1.5 lakhs from the taxable income on the principal amount. This amount may include registration charges and stamp duty, but do bear in mind that they can be claimed only once.

Section 80EE: With Section 80EE of the IT Act, first-time homebuyers can claim an additional Rs. 50,000 on the interest every financial year until the loan is repaid completely. This act applies to the construction of new homes as well as the renovation of an existing home. However, to qualify for this, one must note that the home loan amount must not be more than Rs. 35 lakhs and the value of the property must not exceed Rs. 50 lakhs and the taxpayer must not own any other house.

How can having a home loan save income tax?

After the 2019 Union budget, home loan borrowers can now avail a deduction of up to Rs. 3.5 lakh. The home loan tax benefits are available over and above the existing exemption of Rs. 2 lakhs under Section 24(b). However, the home loan tax exemptions can be claimed only to purchase houses with a value of up to Rs. 45 lakhs. All borrowers who have taken home loans can claim the benefits on loans availed till 21st March 2020. 

This means home loan borrowers have a variety of tax tools and instruments at their disposal to save money. Calculating tax benefits on home loans is also very easy and the facility is now available online as well. There are several tools and platforms that help you determine how you much you can save from existing schemes. These tools instantly calculate the amount based on certain home loan details provided by you. Some of the details required to calculate the amount are the home loan amount, the current tax deductions, rate of interest, gross annual salary, etc. Once you enter these details, you can find out the tax benefits that you can avail from your home loan. 

How do I claim tax benefit on a home loan?

There are a few steps that you need to follow to claim interest on your home loan deduction. In the current financial year, the limit on the amount you can claim as interest on your home loan deduction go up, so it’s great news for all home loan borrowers!

Here are the steps in details that will help you claim interest on home loan deductions. 

Step 1

The first step is to arrange and keep all the required documents in one place.The documents you shall need are: 

  • Ownership details of the property: You must have all the documents that state that you are the owner of the property. In case you are a co-owner, you must have the necessary documents too that mention your share in the property. After all, it is your share that will determine the amount of deduction you can claim. 
  • Details of the paid municipal taxes: Municipal taxes can be deducted from house property income only when they have been paid in full during a financial year.
  • Details of completion of construction or purchase of the house: Besides pre-construction interest, the deduction on interest can be claimed from the year in which the construction of the property is completed. Regarding pre-construction interest, it can be claimed in five equal installments starting from the year of construction completion or house purchase.
  • A statement from the bank which mentions the principal and interest details.

Step 2

Submit these documents to your employer if you are employed

If you need to claim interest on home loan deduction, you must communicate the same to your employer so that they can adjust your TDS accordingly while filing returns. This also ensures that you don’t have to wait until the end of the year to find out your tax liability and adjust it accordingly. If you are self-employed or work as a freelancer, you don’t need to submit these documents to anyone, but you will need them to get an estimate of your Advance Tax liability for each quarter.

Step 3

Calculate the income from house property

The amount of the deduction is limited to Rs. 2, 00,000 lakhs in case of a self-occupied house. However, in case of a house let out on rent, there is no limit on the amount of interest that can be claimed as a deduction. The steps to calculate the income from house property are:

  • Figure out the Gross Value of the property (nil in case of Self Occupied Property and Rental Value if rented)
  • Deduct the municipal taxes paid
  • Deduct the standard deduction (30% of net annual value = Gross value less municipal taxes)
  • Deduct the interest on a home loan

And you get the income from the house property.

Step 4

Claim Interest on Principal Repayment Under Section 80C and Home Loan Deduction 

In case there is Principal Repayment by you during the year, you can claim interest on home loan deduction under section 80 C. However, the total amount that you can claim under section 80C is up to Rs 1, 50,000 lakhs only. 

Other home loan tax benefits to remember 

After going through the home loan tax benefits mentioned above, you might still have unanswered questions like ‘can both husband and wide claim home loan interest?’; ‘can a home loan be taken jointly?’; ‘is marriage certificate required for a joint home loan?’ or ‘can spouse claim home loan benefits?’ To answer these questions, there are a few other things that you must know: 

  1. If you apply for a joint home loan, each person can claim a deduction on the interest up to Rs. 2 lakhs and on the principal amount up to Rs 1.5 lakhs. 
  2.   You will have to submit the marriage certificate if you are taking a joint home loan with your spouse. Only co-borrowers can avail the tax benefits related to home loans and that’s why most people purchase property in joint ownership with their spouse. 
  3. If you have taken a home loan and at the same time as staying at a rented house, you can avail all the tax deductions related to home loans, and along with that, you can also avail the benefits of House Rent Allowance. 
  4. Earlier, only one property was considered as self-occupied, and in case of a second property, a notional rent was charged as income. In the recent financial budget, this charging of rent on the second self-occupied property has been waived off completely.
  5. First-time buyers can claim an additional interest amount of up to Rs 50,000 annually till the loan is repaid.

6     You can also claim tax deduction under section 80(c) for stamp duty and registration fees. However, it has to be within the overall limit of Rs 1.5 lakhs that applies to principal repayment

The only question that remains now is ‘which bank is best for a home loan?’ And the answer depends on your requirement. If you need an amount that isn’t very high, you can opt for instant unsecured personal home loans without paying any collateral and repay them in a shorter span of time. However, if you require a high sum of money, you might approach your bank or compare the interest rates and loan conditions of different banks to make the best choice. 

Thus, while taking a home loan does increase your financial burden by adding an EMI to your expenses, there are ways to save money as well. For example, home loans help you improve your credit score when you make timely EMI payments, it offers various tax benefits and reduces your tax liability, it helps you save a lot of taxes by using the tax deductions available to you, etc. So, stay informed, research well and make the right choice while taking a home loan.