Home Loan Tax Benefit (FY 2023-24): How to Save Tax On Your Home Loan?

With an increase in real estate costs around the country, most people cannot afford to buy a home with their own money. For such buyers, a home loan is the best alternative. While a LIC Home loan can help you fulfill your dream of owning a home, it can also help you save money on taxes. According to the requirements of the Income Tax Act of 1961, availing of a LIC Home loan can help one save on taxes. The most recent fiscal budget added provisions that boosted these benefits even further. If you are planning to choose a home loan anytime soon, this post is for you.

Home loan income tax deduction

A home loan is eligible for deductions under three separate sections of the IT Act. A home loan consists of two parts: principal and LIC home loan interest rate. According to the income tax legislation, you can claim deductions for repayment of both of these components. Let us take a closer look at each of these home loan tax benefit sections in detail:

  1. Under Section 80C: You can claim tax deductions on the principal amount you repay to your lender under Section 80C of the IT Act. In addition to the deduction for debt repayment, a deduction for stamp duty and registration expenses can also be claimed under Section 80C, but one can only claim up to Rs 1.5 lakh. However, it can only be claimed in the year in which the expenses are spent.

In a fiscal year, the maximum LIC Home loan tax exemption under Section 80C is Rs. 1.5 lakhs. It should be noted that alternative investment options, such as ELSS funds, PPF, and tax-saving FDs, are also eligible under section 80C.

Even if you have invested in such instruments, the deduction limit of Rs. 1.5 lakhs would stay unchanged. In other words, the maximum deduction allowed under section 80C is Rs. 1.5 Lakhs.

Important point to note: However, in order to claim this education, the house must not be sold within five years of possession. Otherwise, the previous deduction will be applied back to your income in the year of sale.

  1. Under Section 24(b): Section 24(b) of the Internal Revenue Code provides an income tax rebate on LIC Home loan, but only on the LIC home loan interest rateportion of the loan. Section 24 allows you to claim a deduction on the interest paid on self-occupied residential property on your home loan EMI for the year up to a maximum of Rs 2 lakh from your total income. It is also applicable if you took out a loan for home building or renovation. The deduction applies to the prepayment and processing fees you pay to your lender.

There is no maximum limit for claiming tax exemption on interest on rented property, which means you can deduct the total LIC home loan interest rate paid on your house loan. That is, if you rented out the bought property, you can claim the entire home loan interest rate payment. However, if you have occupied the property, the maximum deduction you can claim in a fiscal year is Rs. 1.5 lakhs.

To claim a tax deduction, a home loan must be obtained for the purchase or building of a property. If it is used for the construction of the house, it must be finished within five years of the end of the fiscal year in which the loan was obtained. If the building takes longer than the specified time, i.e. 5 years, you can claim just Rs 30,000 in interest deductions for the fiscal year.

However, the whole loss can only be claimed against any other source of income up to Rs 2 lakh under the heading ‘Income from House Property’.

Can I claim a deduction on the Interest paid on a home loan during the pre-construction period?

Assuming you purchased an under-construction property and have yet to move in, but you are paying the EMIs. In this situation, your eligibility to claim interest on a LIC Home loan begins only after construction is completed, or immediately if you purchase a completely constructed property. So, does this mean you won’t get any tax benefits on the interest you pay between the time you borrow the money and the time you finish building? No.

Let’s look at why. 

The Income Tax Act allows for a deduction for such LIC home loan interest rate, known as pre-construction interest. Over and above the deduction you are otherwise able to claim from your property income, a deduction in five equal installments beginning with the year the property is acquired or construction is finished is allowed. However, the maximum eligible amount remains at Rs 2 lakh.

For example, suppose you have a home loan for construction and pay Rs 10,000 as a home loan interest rate each month. After two years of construction, the house was finished in 2019. As a result, you can begin claiming the pre-construction loan interest of Rs 2.4 lakh (roughly) only once the construction is completed in five equal payments beginning in 2019. Section 24(b) limits the maximum LIC home loan interest rate deduction to Rs 2 lakh (including current-year interest and pre-construction interest).

Home loan tax benefits under Section 80EE

This tax benefit on home loans is exclusively available to first-time homeowners. If you are a first-time home buyer, you can claim additional deductions of up to Rs. 50,000 under section 80EE if you meet certain conditions. To qualify for this benefit, the home loan amount cannot exceed Rs. 35 lakhs, and the property cost cannot exceed Rs. 50 lakhs.

Can I obtain a deduction for a joint loan?

If you have a joint home loan, you can claim a home loan interest deduction of up to Rs. 2 lakhs and a home loan principal deduction of up to Rs. 1.5 lakhs. To take advantage of this deduction, each joint loan holder must also be a co-owner of the property. So, if you want a bigger income tax benefit on your house loan, a shared home loan can be a great option.

If the loan is obtained jointly, each loan holder can deduct an LIC home loan interest rate of up to Rs 2 lakh and principal repayment of up to Rs 1.5 lakh under Section 80C in their tax returns.

So we are saying, 

With so many options to save taxes with a home loan, it can be difficult for first-time borrowers to take maximum benefit from the available deductions. As a result, it is critical to select a lender with caution. Choose a reputable lender who can provide extensive advice on home loan tax exemption. This will not only help you to realize your ambition of acquiring a home, but it will also allow you to save significantly on tax payments.

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