20/06/2017

Tax Benefits on Home Loan ( Author - HIMANSHU TIWARI )

Buying a home is always a dream. It needs to be well planned and then executed so as to make the most of it. In fact it is quite an important step in Financial Planning. Managing to buy a home out of once own savings seems a faraway dream even for high net worth individuals. There is always a case of savings falling short of the property value. Thus, Home Loan comes to the rescue!

However, with the falling interest rate regime during the period from 1999 to 2006 and the introduction of tax benefits on the interest paid on housing loan and repayment of principal amount, taking a home loan is not only easy but also a favored option. In fact, even if you have the money to buy it outright, availing a home loan may be mathematically a better option. Multiple tax benefits are one of the most important reasons for availing a Home Loan.

Tax Benefits for Various Sections of Home Loan:

The tax benefits under various sections of the Income Tax Act not only attract people who need a loan put is also beneficial for people who can pay out of there on source of savings, as it provides them flexibility in payment and they need not do away with their liquidity.

Let’s first note the various income tax provisions under which tax benefits are available to the tax payers:

  • Tax Benefits for Interest paid on housing loan: Repayment of housing loan is through Equated Monthly Installments (EMI) which consists of principal and interest component. Interest component of the EMI is allowed as deduction under the head ‘Income from Housing Property’, u/s 24 of the Income Tax Act. The amount permissible for deduction is Rs. 2,00,000/- for AY2017-18. Further, in case the house against which loan is taken is given on rent, there is no cap on the amount of interest allowed as deduction.
  • Tax Benefits for Repayment of principal on Home Loan: The principal component paid out of the EMI is permissible as deduction up to Rs. 1,50,000/- under section 80C of the Income Tax Act.
  • Interest paid during the pre-construction period on Home Loan: Interest deduction cannot be claimed for under construction property. However, once the construction is completed, the amount of interest paid on the loan borrowed prior to completion, which is ‘Pre-construction interest’, can be claimed as deduction in 5 equal installments from the financial year in which construction is completed. Further, construction has to be completed within 5 years from the end of the financial year in which loan is taken.

Thus, the above deductions if availed prudently could benefit the tax payer and home loan becomes a favored option to putting in savings.

Also, keep in mind the following points while maximizing deduction benefits:

  • Higher deduction in case of a Joint Home loan and ownership: In case both husband and wife are working, the deduction with respect to interest on home loan and repayment of principal can be claimed by both in proportion of their ownership share.

Let us understand with a simple illustration:


In the following cases, it is assumed that home loan of Rs. 50 lakhs is availed for a period of 20yrs @9.5%.

Case 1: The house is owned and Home loan is taken by a single holder.

Case 2: The house is jointly owned and Home loan is taken by both the partners.

The table below shows the amount of deduction that can be claimed in the first year.

Case 1Case 2
Loan Taken bySingle HolderWifeHusband
Property share100%50%50%
Loan Amount (In Rs.)5,000,0002,500,0002,500,000
No. of Years20 years20 years
Rate of Interest for Home Loan9.5%9.5%
Equated Monthly Installment (EMI) per month (In Rs.)46,60723,30423,304
Amount repaid Annually (In Rs.)559,284279,642279,642
Interest Amount repaid (In Rs.)471,232235,616235,616
Principal Amount repaid (In Rs.)88,05244,02644,026
Tax Deduction that Can be claimed
Interest deduction u/s24 (In Rs.)200,000200,000200,000
Repayment of principal u/s 80C (In Rs.)88,05244,02644,026
Total deduction that can be claimed (In Rs.)288,052244,026244,026
Total deduction claimed by the familyRs. 288,052Rs. 488,05

From the above illustration, you will notice that together a couple can claim additional deduction of Rs. 2 lakhs.

  • Avail both Home loan deduction and House Rent Allowance (HRA) exemption: The deduction u/s 24 (Interest on home loan) and u/s 80C (Repayment of principal) can be claimed along with exemption of HRA. For e.g. A person has bought a flat in Pune and taken a home loan for the same. However, due to his job requirement he needed to shift to Mumbai in a rented apartment. In this case he can claim rent paid for the Mumbai Property as HRA exemption [u/s 10(13A)] along with deduction of interest and principal for the Pune property.
  • Rent a home and avail higher deduction: There is good news to those who intend to buy a second home and rent the same as the amount of interest deduction on home loan which is capped at Rs. 2, 00,000/- in case of self-occupied property, is not applicable for the rented property. The same is illustrated below:

In the following cases it is assumed that the loan of Rs. 50,00,000/- is availed for a period of 20yrs @9.5%. In Case 1 the house is used for self-occupation. In Case 2, the house is rented out @20,000 per month. Deduction that can be claimed in the first year.

Case 1Case 2
Loan Amount (In Rs.)5,000,0005,000,000
No. of Years20 years20 years
Interest Rate9.5%9.5%
Equated Monthly Installment (EMI) per month (In Rs.)46,60746,607
Amount repaid Annually (In Rs.)559,284559,284
Interest (In Rs.)471,232471,232
Principal (In Rs.)88,05288,052
Annual Rent Received @20,000 per month (In Rs.)NIL240,000
Less: Standard deduction of 30 % on Rental Income (In Rs.)80,000
Taxable Income (In Rs.)NIL160,000
Less :Interest u/s 24 (In Rs.)200,000471,232
Deduction that can be claimed as Loss on House Property (In Rs.)(200,000)(311,232)

Thus, tax benefits on home loan makes a case to avail home loan and buy your dream home.

About the author

HIMANSHU TIWARI

CHARTERED ACCOUNTANT
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