Home Loan Tax Benefits: Ways to Secure Income Tax deductions on your Home Loan

Every individual dreams of owning a house. We are here with documented and legal tax deductions to make your dream come true. Contrary to the belief, home loan expert assistance provides beneficial tax deductions and therefore a huge amount of relief. If you are an amateur and fear how to apply for a loan correctly, the article is here to help you understand and calculate the home loan tax deduction during tax filings. What are the common mistakes people make that can result in their loss? How can you apply for a loan against property? Not employing a comprehensible approach, leading to the rejection of a claim, is one of them. How can you leverage the affordable housing schemes, employing different sections for exceptional situations? Home ownership under a loan is financially advantageous and allows substantial benefits during tax filings. The good news is that expert guidance puts your foot on the right scheme that works best for your housing loan, and incorporates the best of the options available. To leverage the benefits, we will discuss the specified attributes in detail:

• Tax benefits under different sections, and the legal ways to leverage them effectively.
• Tax benefits that advocate for joint home loan owners.
• Tax deductions for under-construction properties.
• How do tax benefits with loan prepayment work?
• How can benefits be claimed under different sections and for exceptional situations?

Tax Benefits Under Different Sections

Your taxable income is reduced by combining different sections, making you pay less tax. For the home loan tax deduction, each section claims and targets different factors for repayment, i.e., either the principal or interest. They guarantee a comprehensive amount of tax relief on home loans to protect your rights and dreams.

1) Section 80 C

Tax Benefits under Section 80 C claim for deduction on principal repayment up to a maximum amount of Rs. 1.5 lakh. It applies to the amount you repay towards the home loan's principal. For the deduction, the maximum limit is Rs. 1.5 lakh per financial year. For instance, if you repay Rs. 1.2 lakh towards the principal, or even less than that, you can claim the full amount, i.e., Rs. 1.2 lakh. That's one of the benefits of a housing loan in the income tax.

2) Section 24(b)

Section 24(b), i.e., Interest Payment Deduction, covers the deduction on the interest paid on your home loan. For a self-declared property, the deduction is capped at Rs. 2 lakh per year. Whereas, for a rented property, you could claim the complete interest amount, which is subject to certain conditions. For example, if you pay Rs. 1.6 lakh house loan interest for tax exemption allows you to claim Rs. 1.6 lakh. However, this claim can only be leveraged under the condition of self-occupied property.

3) Section 80 EE & Section 80 EEA

For the eligible first-time home buyers, section 80 EE of the Income Tax Act offers extra deductions on interest. Whereas, section 80 EEA empowers you to provide a higher deduction limit for first-time buyers, but only for properties meeting specific value criteria. For example, if you're a first-time buyer purchasing a property under a qualifying set price, you can claim an additional deduction beyond the standard limits. The standard limits of an extra Rs. 50,000 or up to Rs. 1.5 lakh.

Tax Benefits for Joint Home Loans

Taking a joint home loan in India provides tax deduction for the co-owners and co-borrowers of the property. Meaning, if two people take a home loan together, both can separately claim deductions on both principal and interest under Section 80 C and Section 24(b). However, one needs to be both a co-owner and co-buyer to avail of the benefits. Plus, the claims are proportionate to each co-owner's share in the loan repayment. Make sure that the proportion is clearly defined and documented, along with loan statements and repayment proofs to substantiate claims during tax filings. For example, a couple paying Rs. 3 lakh principal and Rs. 4 lakh interest can split the benefits. Joint homeowners can avail the benefits in tax filing under the following provisions and sections in India:

1) Section 80 C (Deduction of Principal Repayment)

This section advocates for both co-owners to claim a deduction on principal EMI payments. The maximum deduction is up to Rs. 1.5 lakh per person per financial year. The deductions here are available within the overall limit and include other investments such as PPF, ELSS, etc. This provision and deduction claim fall under the condition that the property should not be sold within the next 5 years of possession.

2) Section 24(b)

The section claims a deduction on Interest Payment, where each co-owner who is also a co-borrower can claim a deduction on the interest portion of the EMI payments. Here, the maximum deduction for self-occupied property is up to Rs. 2 lakh per person per financial year.

Tax Deduction for Under-Construction Properties

It's crucial to understand the tax implications during the construction phase when purchasing an under-construction property in India. There is no deduction on Principal Repayment During Construction under the home loan tax deduction section. Section 80 C of the Income Tax Act states that deductions on the principal component are permitted only after the construction is complete. Pre-construction interest accrued during the construction period cannot be claimed immediately. Nonetheless, this total pre-construction interest can be claimed in five equal installments, once the construction is completed and possession is taken. For example, suppose you pay Rs. 5 lakh as interest during the construction phase. After holding the documented possession, you could claim Rs. 1 lakh annually for five years, i.e, five equal installments. You can also claim the deductions for the interest paid in those respective years.

Home Renovation Loan Tax Benefits

If you are renovating or repairing your house, Section 24(b) for home loan interest provides a deduction in interest up to Rs. 30,000 per year. Home improvement loans are specifically for home renovation purposes. They qualify for the tax benefits on the interest component, and it differs from the standard home loan tax deductions. Let us illustrate. Suppose you secure a loan of Rs. 5 lakh to renovate your house, you can only claim Rs. 30,000 a year. Even if the interest you pay for the home renovation loan exceeds Rs. 30,000 in a year. Key considerations are to get hold of financial planning, i.e., the budget for renovation costs. Let your lender categorize and document the loan as a home renovation loan. Maintaining proper documentation supports loan interest payments during tax filings.

Align Tax Benefits with Affordable Housing Schemes

Government housing schemes initiatives, such as Pradhan Mantri Awas Yojana (PMAY) make buyers eligible to claim extra tax deduction under Section 80 EEA. It is also applicable to the home loan interest tax benefits, and principal repayments. To avail of the scheme, your property must have a stamp value limit capped at Rs. 45 lakh. The buyer must be a first-time homebuyer and shouldn't possess any other residential property. Suppose you are a low-income buyer under the PMAY scheme, you are eligible to claim an extra Rs. 1.5 lakh deduction. This reduces your taxable income, resulting in overall lower tax liability. In other words, your tax bill is lower by an additional Rs. 1.5 lakh.

Most Common Mistakes that Lead to Rejection of Claims

Incorrect filing of ITR is often the most common mistake. For instance, entering incorrect figures, leaving out the interest certificate, and not possessing sufficient documents beforehand. In addition to that, the bank loan statements should be kept for protected documentation purposes. For example, if you fail to show repayment details for the principal amount at the time of income tax filing. Plus, if you are a first-time buyer, make sure you meet the criteria for tax deductions. Therefore, make sure you claim the deduction within the desired cap and qualify for the claim amount. If you are claiming the deduction under Section 80 C, do not mix it up with Section 24(B), which is the most Common mistake for people to make.

Takeaway

Home loan tax benefits offer a range of deductions on both principal and interest, making your dream of home ownership more affordable. Expert guidance and proper documentation are key to maximizing these benefits and avoiding common mistakes during tax filing. By understanding and leveraging the appropriate sections and filling out the home mortgage loan application properly, you can significantly reduce your tax liability while securing your future.