Find Out About Home Loan Tax Benefits: Easy Guide

Homebuying can be a daunting task, and with it, comes the responsibility of managing finances. Home loan tax benefits allow for a healthy balance between budgeting and purchasing the home of your dreams. Let’s take a closer look at what these benefits entail and how they can help you save money.

Home loan tax benefits, essentially, are the deductions that can be claimed under the Income Tax Act on the repayment of the principal and interest amount of the home loan. These deductions are offered to encourage homeownership and to make it more accessible for the average Indian citizen.

According to the Income Tax Act, a homeowner can claim tax deductions on the following:

1. Principal Repayment: Deductions on the principal amount can be claimed under Section 80C of the ITA up to a maximum of Rs. 1.5 lakhs. This amount gets deducted from your gross total income, leading to a lower tax liability.

2. Interest Repayment: Deductions on interest payments can be availed under Section 24 (B) of the ITA. The maximum amount of interest paid on a home loan that can be claimed as a deduction is Rs. 2 lakhs per financial year.

Now let’s take a closer look at how these deductions work using an income tax calculator.

Mr. and Mrs. Sharma have an annual income of Rs. 8 lakhs. They have taken a home loan of Rs. 50 lakhs at an interest rate of 8% per annum. The loan tenure is 20 years. They have started the repayment of their home loan, and in the financial year 2022-2023 have made the following payments:

– Principal Repayment: Rs. 1.2 lakhs

– Interest Repayment: Rs. 3.5 lakhs

Using an income tax calculator, let’s calculate the amount of tax the Sharmas will have to pay before and after claiming their home loan tax benefits.

Before Home Loan Tax Benefits:

Gross Income: Rs. 8 lakhs

Taxable Income: Rs. 8 lakhs

Tax Liability: Rs. 62,500 (This is calculated using the ITA slab rates)

After Home Loan Tax Benefits:

Gross Income: Rs. 8 lakhs

Less: Principal Repayment: Rs. 1.2 lakhs

Taxable Income: Rs. 6.8 lakhs (8 lakhs : 1.2 lakhs)

Less: Standard Deduction: Rs. 50,000

Less: Interest Repayment : Rs. 2 lakhs

Taxable Income after Home Loan deduction: Rs. 4.3 lakhs (6.8 lakhs – 2 lakhs – 50,000)

Tax Liability: Rs. 10,000 (This is calculated using the ITA slab rates)

In this example, the Sharmas have saved Rs. 52,500 in taxes by claiming their Home loan tax benefits under the ITA.

It’s essential to remember that tax benefits can only be claimed once you have taken possession of the home and started the repayment of your home loan. Repayment of the loan can be claimed for up to 5 years from the year of possession. Moreover, it’s necessary to know that if the home is sold within 5 years of possession, the claimed deduction will be added back to your taxable income in that particular year.

The benefits of home loan tax deductions are not just limited to your taxes. The lower tax liability, coupled with the repayment of a home loan, can have a significant impact on your home finance management. By lowering your expenses, more disposable income is available, which can be used for investments, savings, and even home improvements.

Conclusion

In conclusion, home loan tax benefits can save you a considerable amount of money in the long run. When browsing for a property, keep in mind the tax benefits you can avail of, and incorporate them into your decision-making process. It’s essential to consult a tax professional or a financial advisor to make sure you’re maximizing your deductions and getting the best deal possible.

By taking advantage of these deductions and managing your finances effectively, homeownership can be more accessible and affordable than you may have initially thought.