Home Loan Tax Benefits: Save Money!

Updated on November 30, 20185 mins read

We often see home loans as a big financial burden and shy away from taking loans while purchasing property. However, home loans come with a host of financial benefits. Let’s see how Mr. Mehta benefited from taking a home loan.

Mr. Mehta is a Mumbai based lawyer who wanted to purchase a house. He was in a dilemma, deciding between taking a home loan and using his savings to make the purchase. Eventually he opted for a home loan as its benefits outweighed the liabilities.

Here is how Mr. Mehta benefited from taking a home loan:

1. Tax Benefits on Home loan:

One of the primary benefits a home loan offers is tax benefit. Home loan EMI is divided in to two parts; Interest payment and Principal repayment. Home loan tax benefits are linked to these two components with different tax treatment.

  • Interest payment: Under section 24 of Income Tax Act, deductions on interest payments are available for purchase, construction, repair and reconstruction of property.This means you can claim  tax benefit not only on interest payments every month, but also on the mentioned costs, incurred within the financial year. Also, processing fee paid at the time of taking loan or pre-payment penalty paid for premature closure of loan can be clubbed with deductions on interest payments. Maximum deduction under Section 24 for self occupied property is Rs. 1.5 lakhs (increased from 1.5 lakhs to 2 lakhs in budget 2014) and there is no limit for let out properties, deductions are available for actual figures in the financial year.

  • Principal repayment: Under Section 80 C of Income Tax Act, you can avail deductions on principal repayment in the financial year. However, the maximum deduction under this section is Rs. 1 lakh (increased from 1 lakh to 1.5 lakhs in budget 2014) which is clubbed with EPF, insurance premiums, school fees, ELSS, NSC etc. Also, you can club deductions on stamp duty and registration fee only for the financial year within which the property was purchased. Do keep in mind that deductions on principal repayments are valid only if the property is self occupied and not let out. Further, all deductions are reversible if the property is sold within 5 years of purchase. Deductions claimed during the period before selling property will be treated as income for the financial year in which you sold it and you will need to pay tax on that. So by taking a home loan, Mr. and Mrs. Mehta collectively saved 5 lakhs on their tax payments! Since his spouse was a co-applicant in the loan, she too availed tax benefit; as both applicants are separately eligible for interest and principal exemption while computing tax. To avail tax benefit on home loan, attach your repayment schedule along with your tax return and show total payment towards principal and interest components of EMI separately. The rest can be taken care of by your CA.

 

2. Home Loan Helps Build a Good Credit Score:

By taking a home loan, Mr. Mehta opened a new chapter of discipline in his financial life, creating the base for a good credit score. Since most of the home loans are a long term loans, it gives longevity to build a credit history. Home loans help build a good credit score as it is generally believed that individuals with home loans are financially disciplined.  Thus, CIBIL (Credit Information Bureau of India Limited) usually favors individuals with home loans by rewarding them with a high CIBIL Score.

 

3. Legal Verification of Documents by Bank:

As soon as you apply for a loan, the banks arranges for a detailed due diligence process. This involves a thorough verification of builder’s/seller’s background, the property papers and related details. Once a bank is involved, you can be doubly sure about the market value of property and authenticity of papers.

“When a bank approves a loan on any property, it is a marketable stamp of approval. So tomorrow when I want to sell my house it’s easier”, Mr. Mehta added.

Even though home loans are a form of financial burden, they can prove to be steady financial investments as well. So next time while buying property, do follow the footsteps of Mr. Mehta and take a home loan to finance your purchase.

 

Here are a few common queries about tax benefits on home loans:

1. Can I avail tax benefit if I take loan from friends or relatives?

Yes. Tax benefit can be claimed against a certificate provided by them. However, recipient of the certificate will be liable to pay tax on interest income received from you. Also, you will be able to claim tax benefit only on interest payments. Only those loans taken from notified institutions are eligible for tax deductions on principal payments.

2. I have borrowed money for the renovation of my house. Can I claim tax deduction on that?

Yes! You can claim a tax deduction of up to Rs. 30,000 on the interest paid. However, this benefit can be availed only if the house is occupied by you.

3. Can I get tax benefits on a land purchase loan?

No, you cannot. However, if you take a composite loan for land and house construction, then you can avail tax benefits after completion of construction.

4. Will I continue to get IT benefits after switching my home loan to another bank?

Yes! You will continue to get IT benefits even after you switch your home loan. However, if you have taken a top-up loan after switching, you will not be eligible for IT benefits on the top-up amount.

5. Can I claim HRA benefits, while my wife claims IT benefits on our home loan?

No. If you are staying with your wife in the property for which she is claiming IT benefits, you cannot claim HRA benefits on the same loan.

6. Can I claim HRA benefits if I stay in my own house?  

No, one cannot enjoy the tax benefits of own house with HRA, as one cannot pay rent to oneself. Hence, whole of HRA received becomes taxable under “Income from Salary”.

7. Can I pay rent to my parents or spouse and avail HRA benefits?

You can pay rent to your parents and avail HRA benefits. However, they will need to account for the same under ’Income from other sources’ and will have to pay tax on it. You cannot pay rent to your spouse. In view of the relationship, this transaction will not bear merit under tax laws. This will be seen as a bogus transaction, leading to scrutiny from IT dept.

 

Do you have more queries? Feel free to ask us in the comments section below! Meanwhile, use the calculator below to see how much you can save by switching your home loan to a lower interest rate.


Tarini

Tarini

Tarini comes with a degree in Mass Communication and Media studies. She joined SwitchME as a content writer and moved on to being an assistant product manager. Tarini is an experienced Content Strategist with a background in Product development and management. She is skilled in SEO, social media strategy and online content marketing and likes to travel when possible
30 COMMENTS

Have a question? Post it here and we will get back to you within 1 working day.

  1. Alok
    Aug 31 2016 at 4:45 pm
    Reply

    I booked a flat in a project in mid 2009. In April 2010, home loan EMI started. The project got delayed and it is complete now, August 2016. I havn’t taken the home loan benefits till date, neither on principal, nor interest. Please advice, how can I avail tax break on home loan. Also, is it good to close the loan account now, since I got some money to do it ? If I close the loan now, can I still get the home loan benefits, if any ?

    • Sumita Nath
      Sumita Nath
      Sep 28 2016 at 1:10 pm

      Hi Alok,

      You can get tax deductions under section 80C AND 24. You can avail the tax benefits first and then close the loan.

  2. Pramod Bhondle
    Feb 08 2016 at 5:12 pm
    Reply

    my wife avail the home loan and i am the co-owner in the same loan. my wife is not working and so no question of taking of tax benefits, can i avail the tax benefits on full amount i.e. total interest and principal amount paid in complete financial year?

    • Tarini
      Tarini
      Feb 08 2016 at 5:55 pm

      Hey Pramod

      Sure, you can go ahead and claim 100% tax benefits on the EMIs being paid by you 🙂

  3. S srikanth
    Jan 25 2016 at 4:21 pm
    Reply

    I got topup loan from lic hfl for renovating my house how much i can use for tax purpose both interest and principle and where to show pl help me already i have 181000 as interest and 55000 as principle in my basic home loan for purchasing a flat

    • Tarini
      Tarini
      Jan 25 2016 at 5:37 pm

      hey Srikanth

      Unfortunately, you will not be able to claim and tax benefits on your to up loan :/ You can claim IT benefits only on home loans.

  4. Gajendra Singh
    Sep 03 2015 at 5:42 pm
    Reply

    Hi i have taken a loan of 20,00,000 from LICHFL for plot purchase and construction. can I claim the tax benefits on this loan. I am not planning to construct this plot for atleast 2 years.

    If I am eligible to avial tax benefits then please share the limits also.

    Regards
    Gajendra

    • Tarini
      Tarini
      Sep 22 2015 at 6:08 pm

      Hey Gajendra

      You will be eligible for tax deductions only after you start construction on the purchased plot. This deduction can be claimed only for the loan amount taken for construction, once the construction is completed. No tax benefits can be claimed before completion of construction. Once complete, you will need to submit a copy of the completion certificate and occupation certificate, so that the plot loan can be converted into a regular home loan, on which you can start claiming benefits. I hope this helps 🙂

  5. isaac
    Jul 02 2015 at 8:33 pm
    Reply

    Hi .. my current loan is with pnb, if i do balance transfer to icici and have an additional top up loan. will i get one interest certificate or two? if two interest certificate can i claim IT exemption on the top up loan.

    • Tarini
      Tarini
      Jul 03 2015 at 3:02 pm

      Hey Isaac

      You can claim tax benefits of up to 30,000 on top up loan only if it has been taken for the purpose of home improvement (renovation), other than that, no IT benefits are applicable.

  6. bijaya saha
    Mar 08 2015 at 9:58 am
    Reply

    hi
    i am having a loan for a underconstruction flat at kolkata .will get possession before two years. due to my employment status i will be residing in secunderabad govt. quarters.if i give the kolkata flat on rent as soon as i get possession. what tax benefits i can avail?

    • Tarini
      Tarini
      Mar 09 2015 at 5:18 pm

      Hey Bijaya

      Here are the following benefits you can avail:
      1. You can avail tax deductions on your interest payments in the under-construction phase in 5 equal installments for the next 5 years under section 24 up to 2 lakhs.
      2. Tax deductions on principal repayments under section 80C up to 1.5 lakhs.
      3. A rented property is the one which derives rental income for you. The tax benefits/deductions for such properties are:
      Municipal taxes paid
      30 per cent standard deduction
      Interest part of home loan without any upper limit (Principal part doesn’t qualify for deduction here).
      Exempt from wealth tax if it is rented for more than 300 days in a year.
      I hope this helps 🙂

  7. Vikas
    Feb 18 2015 at 3:07 pm
    Reply

    Hi took a Home Loan from IHFL in 2012 and in 2014 I switched over to ICICI. I am yet to receive the possession of my house. Will the 3 year limit on claiming possession be calculated from 2012 or 2014.

    • Tarini
      Tarini
      Feb 19 2015 at 5:45 pm

      Hey Vikas

      As per your query, I am assuming that you have taken a home loan for an under construction property. So in that case possession of property will depend on the builder and how soon he will be able to complete teh construction. This is, in no way related to when you take your home loan. Kindly contact your builder regarding the same.

    • Vikas
      Feb 19 2015 at 7:38 pm

      Thanks Tanya for your reply. However I was referring to the IT provision wherein you can get exemption on interest upto 2 LPA only if the possession happens within three years of taking the loan. In situation above where I shifted my loan after 2 years will the three year term for the same be counted from 2012 or 2014.

    • Tarini
      Tarini
      Feb 23 2015 at 2:07 pm

      Hey Vikas

      We are unaware of the existence of any such rule. I have checked on the income tax website, and it doesn’t mention any such conditions with relation to tax exemption on home loan. Could you please give us a reliable reference of how you have learnt of this?

  8. Naren
    Jan 24 2015 at 6:07 am
    Reply

    I have taken a home loan in 2011 from LICHFL and a topup loan(Loan against property again from LICHFL for the same property) in 2014 and have used part of the money for few modifications and also to purchase another land. Now can I claim the interest portion alone of the 2nd loan for tax benefits.

    This is a rentout property and I am showing the rental income for this one.

    • Tarini
      Tarini
      Jan 27 2015 at 1:11 pm

      Hi again Naren

      I am confused about the nature of your second home loan, is it a top up loan or a loan against property? Please clarify the same as it will help me answer your question better.

  9. Harish
    Jan 09 2015 at 11:01 am
    Reply

    Namaste,
    I had taken composite loan for home construction in 2013 but as amount was not sufficient took another loan in 2014. Now as the construction is complete and I will be moving there next month, can I club interest paid for both the loans?

    • Tarini
      Tarini
      Jan 12 2015 at 8:04 pm

      Hi Harish

      Here’s wishing you a happy and prosperous new year 🙂
      From the perspective of tax benefits, you can claim tax deduction on the EMI payments of both loans under section 80C for interest payments (up to 1.5 lakhs) and section 24 for principal repayments (up to 2 lakhs). You will have to claim benefits individually as the bank will provide a certificate for each loan account, of which you can attach copies with your IT returns.

    • Naren
      Jan 24 2015 at 6:02 am

      Tarini, For the above Harish’s case I think Principal should be 1.5Lakhs under 80C and Interest component would be 2 Lakhs.

    • Tarini
      Tarini
      Jan 27 2015 at 12:51 pm

      Hi Naren

      Thank you so much for pointing out the mistake 🙂
      I have updated the same in my reply to Mr. Harish. It seems as if I erred in a hurry. I apologize for the same.

  10. Shubhangi
    Nov 17 2014 at 1:24 pm
    Reply

    For top up loan is it necessary to produce receipts of home repair, renovation reconstruction for claiming income tax benefit of principal amount?

    Shubhangi

    • Chintan Udani
      Nov 18 2014 at 11:28 am

      Hi Shubhangi,

      You can get tax benefits if you produce receipts of home repair/ renovation/ reconstruction. The tax benefit is only for the interest part of your EMI and not the principal part.

  11. Praful K
    Oct 01 2014 at 4:54 pm
    Reply

    My father is planning to avail a top-up on his exisitng home loan. Can he claim tax benefit after the main loan gets converted into Top-up home loan ? Also would it be beneficial to opt for Personal or Top-up Home loan ?

    • Chintan Udani
      Oct 03 2014 at 11:37 am

      Hi Praful,

      To answer your queries –
      1) Yes he can claim tax benefits on the top up home loan. Tax benefits on interest paid in the financial year can be claimed. Also if the top up loan is used exclusively for activities like repair, renovation and construction of the home then tax benefits can be extended to the principal amount as well.

      2) Top-up Home Loan is more beneficial. First of all personal loans charge a higher interest rate when compared to top-up loans. Second the term of top up loans is usually between 10-15 years when compared with 1-2 years for personal loans. Last advantage is that Top-up loans have tax benefits.

      Regards,
      Chintan

    • NISHIGANDH
      Feb 27 2015 at 7:21 am

      IF TOPUP IS TAKEN FOR LETOUT PROPERTY THEN IS IT POSSIBLE TO GET TAX BENEFIT?

    • Tarini
      Tarini
      Mar 02 2015 at 4:57 pm

      Hey Nishi

      Its possible to avail tax benefits of up to 30,000 on top up loan only if it has been taken for the purpose of home improvement (renovation).

  12. Priyanka Parsai
    Aug 18 2014 at 9:25 am
    Reply

    My husband owns a home loan. How can he add me to the home loan as co-owner so that we both can avail tax benefits?

    • Tarini
      Tarini
      Aug 19 2014 at 5:33 pm

      Hi Priyanka

      To add you as a co-owner in his home loan he will need to talk to his bank. The bank will ask you provide standard KYC documents after which the request should be processed.