Property prices have increased considerably over the past few years and if the pundits are to be believed, real estate will continue to grow at a stupendous pace even in the coming years. Thus, if you have been waiting for home prices to stabilize or come down, your wait may not deliver any fruitful results. In fact, homes that are unaffordable now will become even more unaffordable in the future.
A good way to afford homes is to opt for home loans. When a borrower applies for a home loan, they reach out to a lender who sanctions up to 80% of the home’s value as a loan. The borrower can take up to 20 to 30 years to repay this loan amount. Home loans are repaid in the form of EMIs. EMIs constitute a component that goes toward interest repayment and another that covers the principal component of the loan. The long repayment period involved makes it possible for the borrowers to repay the loan at their own convenience.
Home loans offer several advantages. The income tax benefits on home loan allow borrowers to save a considerable amount of money each year and through the tenor of the loan. This article concerns itself with income tax benefit on home loans and how to maximize these benefits. So, read on to know the answer.
How to Maximize Income Tax Benefit on Home Loans
If you want to maximize income tax benefits on home loan, the first thing you must do is familiarize yourself with the various tax deductions available to home loan borrowers these days.
As mentioned before, home loans are repaid in the form of EMIs and tax deductions are available on both the interest as well as the principal component of a home loan.
Home Loan Tax Benefit on the Principal Component
Under Section 80C of the Income Tax Act, a borrower can claim income tax benefits up to a maximum of Rs.1.5 Lakh on payments made to cover the principal component of the home loan. Borrowers must know that this income tax benefit is available only to those borrowers who have invested in an already-constructed property. Those who have invested in an under-construction property can claim deductions under this section in five equal instalments after the completion of the construction of the property. Further, home loan borrowers must also know that if they sell the property within 5 years of buying it, all the income tax benefit they had availed of under this section will get reversed.
If a home loan borrower has two self-occupied homes and two home loans, they can claim tax deductions on payments made towards the principal component of both the loans. However, the maximum income tax benefit one can get under this section cannot exceed Rs.1.5 Lakh.
Further, under Section 80C of the Income Tax Act, borrowers can also claim tax deductions on stamp duty and registration charges. However, the upper limit for these deductions under Section 80C is Rs.1.5 Lakh.
Home Loan Tax Benefit on the Interest Component
Under Section 24(b) of the Income Tax Act, borrowers can claim deductions up to a maximum of Rs.2 Lakh on payments made towards the interest component repayment of the home loan. However, one must keep in mind that under this section, one can claim deductions on the interest component of only those home loans taken for the acquisition and construction of a home. Further, if a borrower has a home loan running on a home they have rented out, there is no upper limit on the interest component that can be claimed as tax benefit. However, the maximum tax benefit that one can avail of under this category cannot exceed Rs.2 Lakh in any given financial year.
Over and above the two sections mentioned above, borrowers can also claim tax deductions under Section 80EE and Section 80EEA of the Income Tax Act. However, these tax deductions are only available to first-time homebuyers and those who have invested in affordable homes. Further, there are other conditions that must be met. Let us now look at what borrowers can do to maximize the income tax benefit on home loans.
Here’s What You Can Do to Maximize Income Tax Benefit on Home Loans
If you want to maximize the tax benefit on your home loan, you can do so by opting for a joint home loan. If you have taken a loan with your spouse, both you and your partner can claim tax deductions under Section 80C and Section 24(b) separately. Thus, in a given financial year, a married couple can claim a maximum of Rs.7 Lakh as tax benefit on a home loan.
Further, if you are not claiming the maximum limits mentioned under various sections of the Income Tax Act, you can increase your total tax savings by availing of a second home loan.
If you are planning to avail a home loan, go ahead. A home loan will help you save a lot of money in taxes each year. However, you must familiarize yourself with various sections of the Income Tax Act to be able to maximize these tax benefits. We hope this article has given you some clarity in this regard. However, if you are still unclear, you can consider talking to a home loan and income tax expert.
Further, home loan borrowers are advised to use a income tax calculator at the beginning of each year. Using the calculator, they can get an understanding of their EMI obligation for the year and make investments to maximize savings.
Finally, since home loans are long-term loans, they must be taken after proper planning. Borrowers must do their research and try and find a lender they can trust and who is also willing to offer them low home loan interest rates. Keeping the things mentioned in this article will certainly help a borrower experience a smooth and hassle-free home loan journey.