Amrita Sharma July 8, 2022

Taking a home loan can bring you the best of both worlds – building a solid investment at lower interest charges and using it as an effective and lucrative tax-saving tool. You need to prudently consider options while applying for a home loan, especially the loan term and loan amount, and avail it with the fastest repayment and lowest cost.

You get the best home loan tax savings when you intelligently apply for a home loan. Here is everything about how you can save on your taxes on home loans.

Using The Interest Amount Of Your Home Loan To Save

Section 80C of the Income Tax Act of 1961 allows you to save up to Rs. 1.5 lakhs annually based on the principal amount of the home loan. But it’s a crowded trail and can be availed using other options like ELSS investments, ULIP investments, tax incentives for paying fees towards children’s education, LIC payments, etc.

There isn’t much room left for home loan savings.

But did you know that the home loan tax savings offered under section 24b, which relies on the amount of interest paid towards your home loan, has no alternative? Therefore, the interest outflow you pay each year is an important factor in the taxes you can save on your home loan.

If you pay an annual interest of Rs. 20000 each year towards your home loan, and if you are within the 30% income tax range, you can save Rs. 60,000 each year. The lower the interest expense, the fewer home loan tax savings.

Principal Home Loan Amount And Loan-Term 

If you take a 30 lakhs home loan for 15 years with an annual interest rate of 7% and fall within the 30% income bracket, the total tax you can save in 15 years is 5.54 lakhs.

On the other hand, if you have a home loan of 50 lakhs for 30 years, the home loan tax savings would be 13.93 lakhs.

However, in the long run, it also means that the total interest expense will be much higher. The best way to balance the optimal amount is to compare the net interest after considering tax incentives.

Excess Interest Payments On Home Loans

The maximum home loan tax savings resulting from interest payments under Section 24b are only limited to Rs 2 lakh. It is a myth that the more interest you pay on a higher value loan, the more taxes you can save.

So, if you are paying an interest of more than Rs. 2 lakh annually, you cannot save tax. 

Large long-term loans have the double drawback of many interest outflows without home loan tax savings and a longer remaining period. To optimize the best combination of lower interest expense and higher income tax savings, use partial prepayment to reduce unpaid loans to levels with annual interest close to the annual limit of 2 lakh rupees.

Increase Your Home Loan Tax Savings With A Joint Home Loan

If both the husband and wife have good earnings and pay a large income tax, they can borrow a larger home loan amount and enjoy the tax deductions separately. As a result, the couple will be eligible for Rs. 3 lakhs tax savings on the principal home loan repayment amount under Section 80C (Rs. 1.5 lakh + Rs. 1.5 lakh).

They will also be eligible for a total tax deduction of Rs. 4 lakhs under section 24b for the interest paid on loan each year (Rs. 2 lakh + Rs. 2 lakh). All applicants must be co-owners of the property to be able to claim this deduction.

Special Tax Deductions For The Under The Affordable Housing Category

If you bought a home in the affordable housing category, you would be eligible for an additional tax deduction of Rs 1.5 lakhs under Section 80 EEA. The deadline for claiming this tax deduction is till March 31, 2022.

This means that your total tax deductions from all home loan-related deductions taken together can be Rs 5 lakh (if it meets the specified ones – Rs 2 lakh u/s 24, Rs 1.5 lakh u/s 80C, and Rs 1.5 lakh u/s 80EEA).

Home Loan Tax Deduction: A Summary

Rules Section 80C Section 24
Reason Principal repayment Interest repayment
Basis of deduction Paid basis Accrual basis
Maximum deduction allowed ₹ 1.5 Lakh ₹ 2 Lakh
Purpose of Loan Purchase, construction of the new house Purchase, construction of the new house
Sale of property The property cannot be sold for 5 years None

Conclusion

Owning a home is a dream, and the real purpose of taking a home loan is not to save taxes but to own your property and invest in a beautiful house for your family. Of course, the tax deduction is a complimentary benefit you get along with your home loans, which is the icing on the cake.

Besides the home loan amount, you can also claim a tax deduction for up to Rs. 50,000 u/s 80EE and up to Rs. 1.5 Lakhs u/s 80C on charges related to stamp duty. So, home loans help home loan tax savings while saving you from paying rent and giving you your dream house.

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