Buying a home is a dream come true for many individuals and families in India. It is not only a symbol of financial stability but also a long-term investment. However, with soaring real estate prices, most people rely on home loans to fund their property purchase. While repaying a home loan might seem like a financial burden initially, the Indian government provides attractive tax benefits on both the principal and interest components of the loan. These deductions are available under Sections 80C and 24(b) of the Income Tax Act, 1961, and can significantly reduce your tax liability.

In this article, we’ll break down these tax benefits, who can claim them, how much you can save, and what the conditions are.

Section 80C – Deduction on Principal Repayment

What is Section 80C?

Section 80C of the Income Tax Act allows individuals and Hindu Undivided Families (HUFs) to claim deductions of up to ₹1.5 lakh per financial year on specified investments and expenses, including repayment of the principal amount of a home loan.

What qualifies for deduction?

The principal portion of the EMI (Equated Monthly Instalment) paid towards a home loan taken from a recognized financial institution (bank, housing finance company, etc.) qualifies for this deduction. This also includes payments made towards stamp duty and registration charges of the house.

Conditions to claim Section 80C benefits:

• The deduction is applicable only if the loan is taken for purchase or construction of a residential house property.

• The property must not be sold within five years from the end of the financial year in which possession was obtained. If it is sold earlier, the deduction claimed will be added back to your taxable income in the year of sale.

• The construction of the property must be completed within five years from the end of the financial year in which the loan was taken.

Maximum Limit:

You can claim a deduction of up to ₹1.5 lakh under Section 80C, but this limit is shared with other eligible expenses and investments such as LIC premiums, PPF, EPF, ELSS, etc.

Section 24(b) – Deduction on Interest Payment

What is Section 24(b)?

While Section 80C covers the principal repayment, Section 24(b) allows a deduction on the interest component of the home loan. This deduction is available under the head "Income from House Property."

What qualifies for deduction?

You can claim a deduction for the interest paid on a home loan taken for the purchase, construction, repair, renewal, or reconstruction of a residential property.

Maximum Limit:

• For a self-occupied property, the maximum deduction allowed under Section 24(b) is ₹2 lakh per financial year.

• If the property is rented out, there is no upper limit on the interest deduction. However, under the current income tax laws (from FY 2017-18 onwards), the loss under the head "Income from House Property" that can be set off against other income is capped at ₹2 lakh. The remaining loss can be carried forward for up to 8 years.

Conditions to claim Section 24(b) benefits:

• The home loan must be taken for the purpose of purchase or construction of the house property.

• The construction of the house must be completed within five years from the end of the financial year in which the loan was taken.

• If construction is not completed within five years, the interest deduction limit is reduced to ₹30,000.

Additional Deduction Under Section 80EE and 80EEA (for First-Time Home Buyers)

Apart from Sections 80C and 24(b), there are two more sections that offer additional tax benefits to first-time homebuyers:

Section 80EE:

• Offers an additional deduction of up to ₹50,000 on home loan interest.

• Applicable only for first-time homebuyers.

• Loan amount must not exceed ₹35 lakh, and the property value must be under ₹50 lakh.

• The loan must have been sanctioned between 1st April 2016 and 31st March 2017.

Section 80EEA:

• Offers an additional deduction of up to ₹1.5 lakh on interest paid.

• Applicable for home loans sanctioned between 1st April 2019 and 31st March 2022.

• The stamp duty value of the house should not exceed ₹45 lakh.

• Cannot be claimed if you’re also claiming benefits under Section 80EE.

Example to Understand Tax Benefits on Home Loan

Let’s consider an example to illustrate how these deductions can benefit a taxpayer:

Mr. Rajesh takes a home loan of ₹40 lakh for 20 years. His annual EMI comes out to be ₹3.6 lakh. Out of this, ₹1.2 lakh goes towards principal repayment and ₹2.4 lakh goes towards interest.

Here’s how Rajesh can claim tax benefits:

• Section 80C (Principal) = ₹1.2 lakh (eligible, since within the ₹1.5 lakh limit)

• Section 24(b) (Interest) = ₹2 lakh (self-occupied property limit reached)

• Total deduction = ₹3.2 lakh

If Rajesh falls in the 30% tax bracket, he can save around:

30% of ₹3.2 lakh = ₹96,000 per year in taxes.

Important Points to Remember

1. Joint Home Loans: If you take a joint home loan with your spouse or family member, both co-borrowers can claim deductions separately, provided both are co-owners and are contributing to the EMI. This effectively doubles the tax benefit.

2. Under Construction Property: You cannot claim tax benefits until the construction is complete. However, interest paid during the construction period can be claimed in five equal installments starting from the year of possession.

3. Rental Income: If you have rented out the house, the rental income must be added to your total income, and the interest deduction will be considered accordingly.

4. Switching Between Old and New Tax Regime: Tax benefits on home loans are available only under the old tax regime. If you opt for the new tax regime under Section 115BAC, you cannot claim these deductions.

Conclusion

Home loans come with substantial tax-saving opportunities under Sections 80C and 24(b) of the Income Tax Act. When planned smartly, these deductions can lead to significant annual savings and reduce the effective cost of the loan. Whether you're buying your first home or considering an investment property, understanding these benefits can help you make informed financial decisions.

Before claiming deductions, always keep proper documentation such as the loan statement, interest certificate, and property documents ready. Consulting with a tax advisor can also ensure you're making the most of the available benefits based on your specific income and property situation.