Navigating Income Tax Benefits for Home Loans in India

Taxpayers who are repaying home loans can claim deductions for both the principal and interest components under the old tax regime. For rented properties, the interest repayments are fully deductible, even for those opting for the new tax regime. Other deductions primarily apply under the old regime. Specific limits for both principal and interest repayments are stipulated by Section 80C and Section 24 of the Income Tax Act, respectively.

Overview of Home Loan Tax Benefits

The table below summarizes the maximum deduction limits available for interest and principal payments made during the financial year.

Principal Repayment Deduction under Section 80C

Annual principal payments made on a home loan are eligible for deductions under Section 80C. This section allows a maximum claim of up to Rs. 1.5 lakh. To qualify for this deduction, the property must not be sold within five years of possession. If this condition is not met, any previously claimed deductions will be added back to the taxpayer's income in the year of sale. This deduction is not applicable for taxpayers who opt for the new tax regime. Furthermore, stamp duty and registration fees can also be included within the overall Section 80C limit of Rs. 1.5 lakh.

Interest Paid on Housing Loan Deduction under Section 24

Under Section 24, interest deductions can be claimed as soon as the interest becomes due for a financial year, regardless of whether it has been actually paid. Key provisions for home loan interest deductions are outlined below.

1. Eligibility Criteria

The following conditions must be satisfied to claim interest deductions under Section 24:The loan must be obtained for the purchase, construction, repair, or renovation of the house property.Construction must be completed within five years from the end of the financial year in which the loan was taken.For loans specifically used for repairs or renovations, or if construction extends beyond five years, a maximum deduction of Rs. 30,000 is permissible.

2. Deduction Limits Based on Property Type

The deduction limits vary depending on the property's occupancy status:

For Self-Occupied Property

A maximum interest deduction of Rs. 2 lakh is allowed.This interest deduction for self-occupied property is not available under the new tax regime.

For Rented Out Property

The entire interest paid can be claimed as a deduction, without any maximum limit.This specific deduction is available to taxpayers under both the old and new tax regimes.

Deduction for Interest During Construction

The pre-construction period refers to the duration when the property remains under development. Interest incurred during this phase can be claimed as a deduction in five equal installments, beginning from the financial year in which construction is completed. For self-occupied properties, the overall interest deduction limit of Rs. 2 lakh encompasses this pre-construction interest.For example, if a home loan was availed in April 2022 for construction, with interest payments of Rs. 10,000 per month, and construction completed in April 2024 (after two years). The pre-construction interest of approximately Rs. 2.4 lakh can only be claimed after construction is finished, starting from the 2024-25 financial year. The maximum interest deduction under Section 24(b) is capped at Rs. 2 lakh, which includes both current year interest and pre-construction interest. So, if Rs. 1,20,000 was paid as interest during 2024-25, the total interest deduction claimable would be Rs. 1,68,000 (Rs. 1,20,000 as current year interest plus Rs. 48,000 as the first 1/5th installment of pre-construction interest).

Deduction for Joint Home Loan

In instances of joint home loans, each co-borrower can individually claim interest deductions up to Rs. 2 lakh and principal repayment deductions under Section 80C up to Rs. 1.5 lakh in their respective tax returns. It is essential for them to also be co-owners of the property. Therefore, taking a joint loan with a family member can help maximize tax benefits.

Additional Deduction under Section 80EE

Section 80EE provides an additional deduction for home buyers, capped at Rs. 50,000. Eligibility requires fulfilling specific conditions:The loan amount must not exceed Rs. 35 lakh, and the property's value should be Rs. 50 lakh or less.The loan must have been sanctioned between April 1, 2016, and March 31, 2017.At the time of loan sanction, the individual must not own any other residential property, thereby qualifying as a first-time home owner.Taxpayers opting for the new tax regime cannot claim this deduction.

Additional Deduction under Section 80EEA

First-time homebuyers can claim a deduction up to Rs. 1.5 lakh under Section 80EEA. The following conditions must be satisfied for eligibility:The property's stamp value should not exceed Rs. 45 lakh.The loan must have been sanctioned between April 1, 2019, and March 31, 2022.The individual must be a first-time home buyer, not owning any other house at the loan sanction date.This deduction is not available if a deduction has already been claimed under Section 80EE.This deduction is also unavailable for taxpayers under the new tax regime.

Loss under the Head House Property

It is possible for house property income to result in losses, particularly due to interest deductions claimed under Section 24. Such losses can be offset against income from other sources. However, the maximum amount of house property loss allowed to be set off against other income heads is limited to Rs. 2 lakh. Any losses beyond Rs. 2 lakh can be carried forward for adjustment in subsequent years. If a rented property generates a net loss, it can be set off against profits from another house property, but not against other income heads like salary or other sources if the taxpayer is under the new tax regime.