Use Your Home Loan To Save Taxes

Updated on March 7, 20198 mins read
home loan save taxes

When you take a home loan, you pay lakhs in interest. Wouldn’t it be nice if this at least got you some tax relief? The good news is, a home loan does help you save income tax. Read more to find out how you can you can use your home loan to save some money. Money saved, is after all, money made. RULES When you calculate your tax payable, you need to categorize income, profits and losses under different sub heads. It is important to know where you can show rental income, interest earned from bank deposits, capital losses, if any etc. Only once you get this right, you will be able to calculate your taxes accurately, as per law. There are different components to a home loan:

  • Principal loan value
  • Interest on this principal
  • Pre – construction interest
  • Stamp duty and registration charges

Here are the sections or categories (of Indian Income Tax Act) where you have to declare the different components to get tax benefit: Now let’s see how you can use these sections and benefits

DeductionsSectionMaximum Deduction 
Principal Repayable80c1,50,000Including other investments
Home loan Interest24b2,00,000
Interest for first time home buyer80EE50,000
Stamp Duty80C1,50,000Including other investments

PRE EMI Pre EMI is the interest you pay on home loan during pre-construction period. Once you get possession of the house, you will start repaying a part of the principal amount too. The combined figure of interest and principal will be your EMI. Tax benefit from Pre EMI Once you house is complete and you have possession of it, you can add Pre EMI interest to your deductions and enjoy more savings. Here is how you calculate annual deduction amount for Pre EMI paid.

Annual deduction   = Total Pre EMI interest paid                                    5

Every year, you can use 1/5th of the Pre EMI interest to take tax benefit. So in five years, you would have used up tax benefit for all the interest you paid during pre construction period. Let’s say you paid total pre construction interest of Rs.5 Lakhs. Every year you can deduct Rs.1 Lakh under ‘income from house property’ and save tax. JOINT HOME LOAN There are many benefits to taking a home loan jointly – you can try for a higher loan value and your cashflow burden is shared. You can take a joint loan with your spouse or any other relative. The guideline for joint loan applications vary slightly from bank to bank. You can read all about the benefits of taking joint loan and joint home loans for couples. Tax benefit on joint home loan All parties to a joint home loan can enjoy tax benefit towards the same loan. This is subject to a few conditions:

  • Co borrower has to be co owner too
  • Proportion of sharing tax benefit is equal to proportion of ownership on the house
  • Each borrower gets to claim only his/her proportion of the benefit, not all of it

Let’s see how much a couple can save if they take a joint home loan, equally divided. We have created a detailed list of frequently asked questions on tax benefits from joint home loan. Do read up and find out more.

ParticularsHusband Wife
Maximum deduction due to interest paid during the year 2,00,0002,00,000
Maximum deduction due to principal repaid during the year 1,50,0001,50,000
Total deduction amount 3,50,0003,50,000

Combined deduction of the couple Rs.7 Lakhs. If both are taxed at the highest rate @ 30% you will be saving Rs.2.10 Lakhs a year. HOME LOAN ON MORE THAN ONE HOUSE If you have two houses, both bought on home loan, do you get tax benefit for both? Yes. You get tax benefit for interest and principal repaid for both your houses. Tax benefit on multiple houses  For the purpose of calculation, you will have to assume you live in one of the houses and that you have rented out the other one. Even if you have not rented out any of the houses, the income tax department will assume that only one if self occupied and the other (s) are all let out. So there are three categories of house property: 

  • Self occupied property
  • Let out property
  • Deemed let out

What does ‘Deemed let out’ mean Deemed let out means – for the purpose of tax calculation, you have to consider or assume a property to be let out. Simply put, you can show one of your houses as your residence. If you own any other houses you have show them as rented out to someone. This means you have to show a rental income even if you aren’t earning any rent. Now, why would you do that? Because, only when you show rental income, you can deduct home loan interest from it and claim tax benefit. Let’s see an example:

Particulars Amount in Rs.
Gross Annual value 2,40,000
Less: Municipal taxes for the financial year-10,000
Net annual value (NAV)2,30,000
Less: Deductions
Standard deduction (30% of NAV)69,000
Interest on home loan 3,00,000
Income/Loss from house property-1,39,000

In this case, you can reduce your taxable income by Rs.1.39 Lakhs. That effectively means, you can save about Rs.41,700 of your money every year. Your can claim a maximum of Rs. 2 Lakhs per house every year.   Here is how rent is calculated Rent for deemed let out property = Gross Annual value When you deem a house to be let out, how do you show rental income? Instead of an actual rent, you take Gross Annual value as rent. Gross annual value is taken as the higher of these two amounts:

  • Actual Rent
  • Expected rent

expected rent is taken as the highest of these amounts:

  • Municipal value – Property value estimated by municipality for property tax calculation
  • Fair Rental Value – On going rate of rent in that area
  • Standard Rent – If a rent has been fixed under Rent Control Act

Rent for self occupied property The rent for self occupied property will be NIL. So when you pay interest on your home loan and you never earn a rent on that house, you will always end up with Loss from House property. A note on loss from House property You may have one or more houses. You may be earning rent on one house and living in the other. More often, than not – your EMI and interest every year will be much more than the rent you earn. When you compute taxes, the outcome of this will be Loss from House Property. This is not unusual. ‘Loss from house property’ simply means that you are paying more EMI and and earning less rent. Buying a house is a huge investment. Regular rental income may not be much, but it will cover some of your EMI outflow. The typical plan is that when you sell the house in future, the increase in market value should make up for this loss. A note on carry forward In a financial year, you can deduct a maximum of Rs.2 Lakhs for home loan interest. Now what if you have paid more interest during the year. Can you use it in future? Yes, mostly. In a year, it could be that you were not able to set off all the loss from house property against other income. This could be because:

  • You had no other income against which you could set this loss off
  • Your income was less than the loss from house property
  • Your loss from house property was higher than Rs.2 Lakhs

In all of these cases, you will be have some balance losses to carry forward. You can carry forward and use these losses as deduction for the next 8 financial years. But only in certain cases.

  • Self occupied property – Can not carry forward losses
  • Let out property – Can carry forward losses

TOP UP LOAN Top up loan is any additional loan on your existing home loan account. Technically, you can take a top up loan for any purpose. you can claim tax benefit on top up loan only if you use it for construction, purchase, repair or renovation of your house. You may find it useful to read why you should opt for top up loan and the tax benefits in detail on our website. LAND + CONSTRUCTION LOAN If you take a loan to buy land with a plan to build a house on it, you can take a Composite loan. In a composite loan, the bank allows you to buy land on condition that you will complete building a house within 2-5 years (varies from bank to bank). Tax benefit on Composite Loan You can take tax benefit on interest and principal after your house is constructed. However, you must keep these points in mind:

  • To take tax benefit, you have to complete construction within 3 years of taking the loan or buying the property – whichever is earlier
  • For composite loan, you can not claim tax benefit for interest paid during construction
  • If you take a normal land loan, you will not be able to claim tax benefit under section 24(b)  and 80C at any point.

STAMP DUTY AND REGISTRATION When you buy a house, you have to pay stamp duty and register the property in your name. Only then you can claim to be the legal owner of the house. Know all about Stamp Duty and Registration While Buying a House on our website. Since these are significant expenses, the income tax law allows you to claim deduction for both under section 80C. Of course, even after including this, the maximum benefit you can take under section 80C will be Rs.1.5 Lakhs.  Some points to remember when you claim this deduction:

  • You can only claim this deduction in the actual financial year when you paid the stamp duty and registration charges.
  • You can claim this benefit only after you get possession of the house. So for property under construction, you can claim this benefit only if your agreement and possession are within the same financial year.
  • Deduction on stamp duty is allowed only for new purchase. You can not claim this benefit if you are buying a resale property
  • You can claim this deduction even if you don’t take a home loan to buy the house.

IMPACT OF GST GST refers to Goods and Service tax that has replaced multiple taxes which were prevalent before. So technically, every transaction that came under the purview of service tax or VAT will now be under GST regime. While GST is levied on under-construction Property, there will be none if you are buying a fully constructed property. For home loans, GST has replaced service tax on the following components:

  • Processing fees
  • Pre-payment fees in the case of fixed interest loan
  • Charge on cheque bounced/return or default on EMI
  • In the case of property under construction, GST will be charged on ⅔ rd value of the property

While the above are immediate effects, we will surely see some indirect effects of the new GST regime over the next few years. Find out all about the impact of GST on home loan and be well prepared before you buy your next house. Taking a home loan is matter of opportunity cost. Regardless how much savings you have, you must see how you can save by taking a home loan for your next house. To know just how much you can save, try out our Income tax benefit calculator right away. You can also sign up to get a call back from one of our home loan experts to know your option.   

Suma Ganesh

Suma Ganesh

Suma is an MBA in Finance and Marketing from ICFAI, Bangalore. She worked as an investment advisor to retail and high networth clients for nearly 7 years at Allegro Capital Advisors Pvt Ltd. This gave her a first hand understanding of the needs of an individual customer. With this edge, she moved on to Adi FinShiksha Pvt Ltd, where she trained financial advisors to manage their clients' investments and financial needs. With deep understanding of customers and their advisors, Suma then moved on to writing content in the space of personal finance. she is currently working as part of the content creation team at SwitchME, addressing the needs of home buyers and home loan borrowers.

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