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Tata Capital > Blog > Loan for Home > Building Wealth: Home Loan Principal Deduction Explained

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Building Wealth: Home Loan Principal Deduction Explained

Building Wealth: Home Loan Principal Deduction Explained


The world of home loans can seem daunting, but understanding specific financial benefits can make the journey a lot smoother. One such benefit is the home loan principal deduction. This can save you money in the long run. By the end of this article, you will have a clearer understanding of this important financial tool.

What is Home Loan Principal Deduction?

When you secure a home loan to purchase your dream abode, the repayment mechanism is structured in such a way that your monthly or yearly installments consist of two primary components: the principal and the interest. The principal is essentially the actual loan amount you borrowed, while the interest is the cost you pay to the lender for borrowing that money.

Now, to promote homeownership and provide some relief to homebuyers, the government introduced a provision known as the Home Loan Principal Deduction.

This fiscal tool allows homeowners to reduce their taxable income by the amount they repay as the principal of their home loan during a specific financial year. By offering this deduction, the government acknowledges the financial strain of purchasing a home and offers taxpayers an opportunity to alleviate some of their tax burdens.

What is Home Loan Principal Deduction Section?

The home loan principal deduction section is a section under the Income Tax Act designed to give relief to taxpayers who have home loans. It allows them to reduce their taxable income based on the principal repayment, making homeownership more financially beneficial.

Are you curious about under which section the home loan principal comes? It comes under Section 80C of the Income Tax Act. It's like a safe place for saving on taxes, and one of its standout features is that you can use it to save on taxes when you're paying back your home loan.

Who is Eligible to Claim Home Loan Principal Deduction Under Section 80C?

If you've taken a home loan and are actively repaying it, you qualify. But remember, you must retain the property for a minimum of 5 years after taking possession. If you sell earlier, any deductions you've claimed will get added back to your taxable income in the year of sale.

Example: Mr. Sharma claimed a total deduction of Rs. 4 lakhs over 4 years. If he sells his property in the 5th year, the Rs. 4 lakhs will be added to his taxable income for that year.

Can I Claim the Entire Principal Amount as a Deduction Under Section 80C?

While it might sound appealing to claim the entire repaid amount, there's a cap. The maximum deduction permitted under Section 80C, encompassing all eligible investments and expenditures, stands at Rs.1.5 lakh.

Example: If Mrs. Gupta repays Rs.1.8 lakhs towards her loan's principal and invests Rs. 50,000 in a tax-saving FD, she can only claim Rs. 1.5 lakhs as her total deduction under Section 80C.

Can I Claim Deductions for Multiple Home Loans Under Section 80C?

Certainly! If you have more than one home loan, you can claim deductions for all. But, the combined deduction, together with other 80C benefits, must not surpass the Rs. 1.5 lakh mark.

Example: Mr. Roy has two home loans. He repays Rs. 1 lakh towards the principal for the first property and Rs. 70,000 for the second. Although his total principal repayment is Rs. 1.7 lakhs, he can only claim a deduction of Rs. 1.5 lakhs.

Repayment of Housing Loan Under 80C

This section is a haven for tax-saving avenues. When repaying a housing loan, the deduction for the principal amount repaid is permitted. The cap stands at Rs. 1.5 lakh, including other eligible investments. Separate provisions, like Section 24, cater to the interest portion.

Benefits of Availing Home Loan Principal Deduction

Homeownership, while being a significant milestone in one's life, can also be a weighty financial commitment. Thankfully, provisions like the Home Loan Principal Deduction exist to soften the financial impact. Here's a deeper dive into the multifaceted advantages of leveraging this provision:

Significant Tax Savings: The immediate and most tangible benefit of availing this deduction is the reduction in tax liability. By claiming the principal repayment as a deduction, homeowners can significantly diminish their taxable income, ensuring that they retain a larger portion of their hard-earned money.

Example: Ms. Patel, who is in the 30% tax bracket, repays Rs. 1.5 lakhs as her loan's principal in a year. By claiming this as a deduction, she can potentially save Rs. 45,000 in taxes.

Enhanced Financial Planning: By being aware of such deductions, homeowners can plan their finances better. The potential tax savings can be redirected towards other financial goals, be it further investments, home improvements or building an emergency fund.

Encouragement for Home Ownership: The provision acts as an incentive for potential homeowners. Knowing that part of their repayment will lead to tax benefits can make the decision to invest in a property more appealing.

Flexibility in Investment Choices: While Section 80C of the Income Tax Act encompasses a range of investment avenues, the ability to include home loan principal repayment expands choices for taxpayers. It allows them to balance their portfolio without missing out on tax-saving opportunities.

Example: Mr. Rao, besides repaying his home loan principal, also contributes to a PPF account. He can comfortably claim deductions for both under Section 80C, optimising his tax savings.

Increased Long-Term ROI: When the tax benefits over the tenure of the loan are aggregated, the return on investment (ROI) on the property appreciates. The effective cost of the loan is reduced, ensuring that homeowners reap greater returns when they decide to sell or lease the property.

Financial Discipline: Since the benefits of the deduction are linked to the repayment of the home loan, it indirectly instills a sense of financial discipline in homeowners. Regular repayments, apart from reducing the loan burden, also assure consistent tax benefits.


The road to homeownership, although filled with financial intricacies, can be made smoother by understanding tools like the Home Loan Principal Deduction. By leveraging these tools, the financial load of owning your dream abode becomes lighter, and the journey is much more pleasant.

Considering taking a step further into understanding housing finance? Dive into the myriad of options with Tata Capital, your trusted companion in this exciting journey.

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