The Government of India offers home loan tax benefits to individuals who take a loan to
purchase their first house. The aim is to provide a boost to the real estate market and encourage individuals to own homes. You can also avail tax benefit on the interest paid on all your home loans, regardless of whether it was for your first home or not. Let us take a look at the various scenarios involved:
Deduction for principal repayment
Under Section 80C of the Income Tax Act, the actual principal repaid towards your home loan can be claimed as a deduction. The deduction is available for your first home. The deduction is also applicable to a rented home when the owner is staying in a different town for work. The maximum deduction available under Section 80C is ₹1,50,000. The limit is raised to ₹2,00,000 for senior citizens.
Deduction for interest paid on a home loan
Income tax benefit on home loan also includes deduction on the interest paid under Section 24 of the Income Tax Act. If the construction of the home was completed within five years of the loan disbursal, actual interest paid up to ₹2,00,000 are allowed as a deduction when calculating the taxable income for the individual. The cap is increased to ₹3,00,000 for senior citizens if the loan was for a self-occupied first home. If the construction of the home is not completed within five years, the tax exemption is allowed up to ₹30,000 only.
Additional deduction under Section 80EEA
Under Section 80EEA, an additional deduction of ₹1,50,000 can be availed if the loan was for the purchase of an affordable house under ₹40 lakh till March 2020. Again, this deduction can only be availed for a self-occupied first home.
Additional deduction under Section 80EE
If you have taken a loan for your first home after 1st April 2016, you may be eligible for an
additional deduction of ₹50,000 under Section 80EE of the Income Tax act. You can avail this deduction if your home finance was for less than ₹35,00,000 and the value of the property was under ₹50,00,000.
Deduction for interest paid pre-construction
Deduction on home loan interest rate is only available after completion of construction or
immediately on the purchase of a fully constructed house. But the EMI payments would start as soon as the loan is disbursed. You could still claim Income tax benefit on home loan interest paid during the construction phase – you would do this after the construction has been completed. The interest paid can be claimed in equal parts for five financial years post-completion, up to a maximum of ₹2,00,000 per year. The limit includes both the interest paid in the current year and the deduction being claimed for the interest paid during the construction of the property.