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Tata Capital > Blog > Loan for Home > Unlocking Home Loan Interest Tax Exemption: A Comprehensive Guide

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Unlocking Home Loan Interest Tax Exemption: A Comprehensive Guide

Unlocking Home Loan Interest Tax Exemption: A Comprehensive Guide


Purchasing a home is not only a significant financial milestone but also a long-cherished dream for many individuals and families in India. Recognising the importance of home ownership and the need to encourage it, the Indian government provides various tax benefits to make the journey to owning a home more affordable. Buying a home involves shelling out a significant amount, running into lakhs, and home loans are the only viable option. Home loans are basically a type of loan against properties and interestingly, one of the most substantial tax benefits available to homeowners is the home loan interest tax exemption.

As per the current taxation laws, taxpayers can claim a deduction of both interest and principal repayments of the home loan EMIs. In this comprehensive guide, we will understand these exemptions in detail particularly focusing on the interest portion.

Housing Loan Income Tax Exemptions

Housing loan income tax exemptions refer to the benefits provided by tax authorities that allow individuals to deduct certain expenses related to housing loans from their taxable income. In many countries, including India, these exemptions are designed to encourage home ownership and provide financial relief to individuals who are repaying housing loans. The Income Tax Act, 1961 offers three primary sections under which you can claim housing loan income tax exemption:

Section 24(b)

Are you curious to know under which section the housing loan interest deduction comes? Section 24(b) of the Income Tax Act, 1961 addresses the home loan interest exemption in income tax. Under this section, you can claim a deduction on the interest paid on your home loans thereby reducing your taxable income. The key features of this home loan interest exemption section:

Self-Occupied Property: A self-occupied property refers to a residential property that is used by the owner for their own residence. When it comes to claiming tax deductions on a housing loan for a self-occupied property, there is a maximum limit set by the tax regulations. For a self-occupied property, you can claim a maximum deduction of up to Rs. 2 lakhs per financial year on the interest component of your home loan.

Let-Out Property: A let-out property, on the other hand, is a property that is rented out to tenants, generating rental income for the owner. In the case of let-out properties, there is no upper limit on the interest deduction. You can claim the actual interest paid as a deduction from your total income without any maximum limit.

Purpose of Loan: For claiming home loan interest tax exemption, you can use the proceeds of loans for acquiring, constructing, repairing, renewing or reconstructing your home. Therefore, you can also claim tax deductions for home renovation loans.

Time Period: The loan should be taken on or after 01 April 1999. Also, the acquisition or construction of the home should be completed within 5 years from the end of the financial year in which the loan was taken. The deduction is further reduced to Rs. 30,000 per financial year in case the prescribed conditions are not satisfied.

Section 80EEA

Section 80EEA is another home loan interest exemption section designed to provide additional relief to first-time homebuyers, specifically those who opt for affordable housing. This section offers an extra deduction on the interest paid on home loans. The key features of this section include:

Affordable Housing: The deduction is applicable only for loans taken to purchase affordable homes. Therefore, residential properties with a value up to Rs. 45 lakhs are eligible for deduction under this section.

Maximum Deduction: The maximum deduction available under this section is Rs. 1.5 lakh for each financial year for the interest paid on the home loan.

Period of Home Purchase: For claiming deduction under this section, the loan should be sanctioned by the financial institution between 01April 2019 and 31 March 2022.

First-Time Home Buyers: One of the peculiar features of this section is that you should not own any home on the date of sanction of this loan. Thus, this section is specifically for first-time home buyers.

Section 80C

While Sections 24(b) and 80EEA are home loan interest tax exemption sections that deal with the interest component of the home loan; Section 80C focuses on the principal repayment. This section encompasses a range of investments and expenditures, one of which is home loan principal repayment. The key features of this section are:

Maximum Deduction: Taxpayers can claim a deduction of up to Rs. 1.5 lakh under Section 80C. This deduction limit also includes various other investments and payments such as Provident Fund contributions, National Savings Certificates, ELSS and more.

How You Can Claim Home Loan Interest Deduction?

Claiming housing loan interest tax exemption is not tricky; however, you should have adequate proof handy to ensure that there are no inaccuracies whatsoever. Here are certain points you should keep in mind while claiming home loan exemption in income tax.

1. Maintain Accurate Records

You should maintain all loan-related documents properly including the loan agreement, payment receipts and interest certificates provided by the lender.

2. Calculate Interest Paid

Calculate the total interest paid during the financial year for your home loan. You can directly download the interest certificate from the website or mobile application of your lender. It shows the EMI paid during the year along with the bifurcation between interest and principal component.

3. Determine Eligibility

You should determine your property's occupancy status (self-occupied or let out) to determine the applicable deduction under Section 24(b).

4. Claim in Income Tax Return

While filing your income tax return, report the interest paid under the appropriate section 24(b) or 80EEA and principal repayment under Section 80C. You should ensure that details are correctly furnished to avoid any legal hassle afterwards.

5. Submit Supporting Documents

In the event of scrutiny by tax authorities or on receipt of any notice, you should be prepared to provide the necessary documentation to validate the interest paid and the property's purchase.

Summing Up

The home loan interest tax exemption provisions in India stand as a testament to the government's commitment to making home ownership an attainable goal for individuals and families. By understanding and optimising the benefits offered under Sections 24(b), 80EEA and 80C of the Income Tax Act, 1961, you can significantly reduce your tax liability while realising your dream of owning a home. In any case, it is important to note that the loan should be taken from a recognised financial institution as specified under the Income Tax Act, 1961. Thus, one of the significant aspects of buying a home and getting a home loan is finding the right lender.

TATA Capital offers some of the most affordable home loans with attractive terms and flexibility. The borrower-friendly loans ensure that EMIs do not pressure your finances while helping you achieve your dream of owning your own home. You can use the home loan EMI calculator by TATA Capital to further plan your EMIs and finances. You can also get home renovation loan to rejuvenate your home. Apply now!

Frequently Asked Questions

Q1. What is a home loan interest tax exemption?

Home loan interest tax exemption refers to the relief provided by the Indian government to taxpayers on the interest paid on their home loans. It aims to ease the financial burden of housing loans and promote home ownership. Here, the interest paid on home loans is directly reduced from the taxable income. Consequently, this reduces your tax liability.

Q2. Who is eligible for home loan interest tax exemption?

Individuals and Hindu Undivided Families (HUFs) who have taken a home loan for the purchase or construction of a residential property are eligible to claim housing loan interest tax exemptions.

By harnessing these tax benefits wisely, you can turn your aspirations of home ownership into reality while simultaneously optimising your tax planning strategies. You should always consult with tax professionals or financial advisors to ensure accurate compliance and maximum utilisation of these deductions.

Q3. What types of properties are eligible for the tax exemption?

The tax exemption is applicable to both self-occupied and let-out residential properties. The term "residential property" includes apartments, flats, houses and other forms of dwellings. It is important to note that commercial properties are not eligible for these exemptions.

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