What Are The Tax Benefits On A Home Loan

With the Government’s push on affordable housing, buying a house has become possible and easy with home loan. There are banks and other non banking financial companies that are giving out home loan to customers to make purchases of resale and new flats. But even before the Pradhan Mantri Awas Yojana was introduced, the income tax gave benefits to people who had opted for home loans. Let us understand these benefits.

Tax benefits on Principal repayment:

To encourage people to take home loans, the Income Tax Act gives a deduction to borrowers who repay principal on their home loan. This deduction is available under Section 80C of the Income Tax Act up to Rs. 1,50,000 every year. This deduction is available on payment basis which means actual repayment has to happen. Even if part repayment of the loan is done over and above the instalment, it is eligible for a deduction under this section. This deduction is only available for flats used for residential purposes.

This deduction is available only on fully constructed properties. That means if the flat is under construction, no deduction will be available. Deduction also won’t be available if the flat is sold within 5 years of purchase. In case the flat is sold, this deduction will be reversed.

Tax benefits on interest payment:

These benefits are governed by Section 24 of the Income Tax Act. The benefits under this section depend on the use of the property i.e the treatment and limits are different for a property used for residential purposes and a property that earns rental income.

For a property used for residential purposes, there is no income from the property. The interest paid to the bank in such cases is allowed as a deduction up to Rs. 2,00,000. This negative house property income can be set off against income from other heads such as salary, business income, income from other sources. However, it cannot be set off against capital gain income. If the loss cannot be fully set off, it is carried forward to be set off in the next year.

In case the property is given on rent, then it earns rental income for either part or the full year. In such a case, a standard deduction of 30% is allowed to cover expenses. Apart from the standard deduction, interest on home loan is allowed as a deduction. However, there is no limit on the interest amount allowed as a deduction in such a case. For example, if the total interest paid to the lender is Rs. 6,25,000 and the rental income is Rs. 3,00,000, then the entire Rs. 6,25,000 will be allowed as a deduction. The negative house property income will be allowed to be set off against other heads and carried forward.

In addition to that, in Budget 2019, the finance minister announced Section 80EEA which gives a deduction of Rs. 1,50,000 over and above the Rs. 2,00,000 limit in Section 24 to owners of residential house property for loans taken during financial year 2019-20. However, the stamp duty value of the house must not exceed Rs. 45 lakhs and the assessee must not own any other house property.

These deductions help to reduce the cost of owning a house and also reduce the tax payable by a homeowner.

Arjit Chalmela is a finance student who loves to write in his free time. He has spent considerable time researching the foreign exchange rate.