Important Tax Benefits on Home Loan That Every Person Should Know

The real estate sector requires a major boost from the government as it is experiencing a liquidity crunch.

The real estate sector requires a major boost from the government as it is experiencing a liquidity crunch. According to an India House Price Index report, the 1-year price growth or CAGR is 4.66%. At such a time, home loans have become one of the most important factors affecting the sector. Home loan tax benefits provided under the IT Act are also just as vital a pointer to consider offering homebuyers the opportunity to substantially reduce their financial burden.

Affordable housing under Housing for All by 2022

Pradhan Mantri Awas Yojana or Housing for All by 2022 provided the much-needed boost to the real-estate sector giving due emphasis to affordable housing along with a host of incentives to home buyers. 

GST was cut down to 5% for all under-construction units, and 1% to affordable housing units. Second-home buyers were also given benefits such as TDS rental limit of Rs.2.4 lakh along with capital gains exemptions for once of up to Rs.2 crore in case of two properties. 

The government has constituted an Alternative Investment Fund for its stalled and stressed assets in the mid-range and affordable housing category, aiming to bring relief to stressed developers as well as affected buyers.  

Even though most home loan interest rates are relatively low after several repo rates cut, along with introducing repo-rate linked home loan products, there is a need for stimulating demand for India’s real estate sector. 

Tax benefit to avail loan for affordable housing

It was indicated in Budget 2020 that a timeline for availing home loans under this affordable housing scheme is extended till March 31, 2020. The highest amount of interest paid for availing home loan tax benefits is increased from Rs.2 lakh to Rs.3.5 lakh for purchasing a home under the affordable housing scheme. Moreover, there exists an additional benefit for first time home buyers provided that the stamp duty amount is up to Rs.45 lakh.

Budget 2020 has declared an extension of these available deductions following section 80EEA under the Income Tax Act till the next financial year. This measure is aimed to encourage India’s housing industry to meet the government policy of “Housing for All by 2022”.

How can borrowers claim this deduction?

Income Tax Act 1961 lay down that the interest on home loan as paid by an individual may be claimed as deduction from the total gross income. This interest amount that may be claimed for deduction is restricted at Rs.3.5 lakh for individuals availing home loan tax benefits under the affordable housing scheme. 

Revision of the deduction from the limit of Rs.2 lakh for a housing loan valued up to Rs.45 lakh was held to be in the interest of middle-class first time home buyers.

Differences in availing home loan tax benefits 

The tax benefits on housing loans under the present income tax regime take into account the type of property involved as well. The tax benefit will vary depending on the property being self-occupied or if it is a let-out property. 

In case of self-occupied property, tax benefits are available both on the principal amount linked to the loan along with the interest that has been paid on it. Section 80C of Income Tax Act indicated that the deduction for the principal of the loan repaid up to Rs.1.5 lakh a year and the interest paid could be deducted up to Rs.2 lakh per annum, under section 24 under the Act. Such deductions are to be made from the total gross income before tax calculation, ultimately reducing the total tax payable. 

However, if the individual opts for the new tax regime, the tax deductions and exemptions under section 80C of the Income Tax Act, will become redundant. So if an individual has taken home loan tax benefits or has committed to section 80C investments, it would be advisable to adhere to the previous tax system.  

Home loans under Pradhan Mantri Awas Yojana (PMAY)

Check whether you can apply for such a loan under this scheme by understanding the PMAY eligibility criteria. It reduces home loan rate simplifying the repayment process significantly.

With reduced interest rates and an online application process, availing such a loan today is easier than ever before. Keep a list of all the documents you need for a home loan handy to enjoy a hassle-free process. The applicant should also make an estimation of the liability using home loan tax benefit calculator.

Also Read: Owning a House No Longer a Dream Now! Know Tax Exemptions on Your Home Loan

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