Tax Savings on Home Loan

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A Home Loan (also known as House Building Loan) fulfills your dream of living in your own home. But do you know that a Home Loan can also save taxes? Yes you read that right! To know the complete details about how to avail the tax savings on home loan just read on.

Also Read: Tax Saving on Education Loan

Tax Deductions on Home Loan

Tax deductions on Home Loan are spread into 2 parts:

  1. Tax Deduction on Principal part of the Home Loan; and
  2. Tax Deduction on the Interest part of the Home Loan.

deduction on home loan repayment

Let us discuss each part separately

Tax Deduction on Principal part of the Loan [Section 80C]

Principal repayment of Home Loan is covered under section 80C of the Income Tax Act. There is no limit as to the amount of deduction claimed for principal repayment of home loan. However the overall limit of all deductions that can be claimed under section 80C is Rs 150,000/-. An individual or HUF can claim this deduction.

There are some conditions which must be satisfied to claim deduction for principal repayment of home loan. These are listed below:

Conditions to be satisfied for claiming deduction of Principal Repayment of Home Loan under Section 80C
1The loan must be taken for purchase or construction of a new house property;
2The construction of the property must be completed;
3The lock in period for the property from possession is 5 years. That means that the house property cannot be sold within 5 years from the date on which possession was taken. In case the property is sold before the expiry of 5 years, all the deductions claimed earlier will be reversed in the year of sale and tax will be charged on the same.
4The deduction is allowed on cash basis i.e. deduction for principal part of home loan will be available only if repayment is done in cash in the FY.

Additional Tip: The amount paid as Stamp duty and Registration charges of a house property can be claimed as deduction under section 80C even if no home loan is taken by the assessee.


Tax Deduction on the Interest part of the Loan [Section 24]

The interest paid on home loan also qualifies for deduction under Section 24 of the Income Tax Act.

Interest paid on home loan is available as a deduction from Income from House Property in the following manner:

Sl No.CaseLimit for Deduction of Interest Repayment
1House Property for which Home Loan is taken is self-occupiedMax. deduction available would be Rs 2,00,000
2House Property for which Home Loan is taken is not self-occupiedNo limit
3House Property for which Home Loan is taken is not self-occupied as a reason of employment, business or profession carried on at any other place where the assessee has to reside for such employment, business or profession. In this case the House Property will be deemed to be Self OccupiedMax. deduction available would be Rs 2,00,000

Following points to be noted for deduction under Section 24 for Interest Repayment for Self Occupied House Property (i.e where the deduction is limited to Rs. 2,00,000)

Sl No
1The home loan must be for purchase or construction of NEW house property
2The purchase or construction must be completed within 5 years (earlier the limit was 3 years till FY 2015-16) from the end of the Financial Year in which the loan was taken

Please Note: Self Occupied House Property means a House Property in which the assessee or his family resides. It also includes any vacant House Property. A House property will not be considered as Self Occupied if it is rented out.

Cases where the deduction on Interest repayment will be limited to Rs 30000/- instead of Rs. 200000/-

In case of a Self Occupied House Property, if the two conditions mentioned above are not satisfied, the deduction will be limited to Rs 30,000/- instead of Rs 2,00,000/-.

To be specific, the deduction will be limited to Rs 30,000 in the following cases:

1. The Loan is for repairs/ renovation of the House property,

2. The Purchase or construction could not be completed within 5 years from the end of the Financial Year in which the loan was taken.

Deduction under section 24- Interest Repayment

Loss from House Property and its Set Off

Loss from house property can result in tax savings as it can be set off against income from other heads. Loss from house property can arise in the following cases:

Case 1: Rent Earned is less than Interest paid on home loan

As discussed earlier, the interest paid on home loan is allowed as a deduction from rent earned on let out house property to arrive at the income from house property. However, if the rent earned is less than the interest paid then it will result into loss from house property.

Case 2: Case of Self Occupied House property

In cases of self occupied house property, there will be no rental income. However, the repayment of interest will still be available as deduction under section 24. Thus it will give rise to loss from house property.

In both the cases discussed above, the loss from House Property can be set off against any other head of income. This will reduce the overall tax burden.

Change brought by Budget 2017

Budget 2017 has restricted the amount of set off of loss from House Property to a maximum of Rs 200000 in the current financial year. Any loss which could not be set off due to this limit can be carried forward to the future years upto 8 years.

Note: 

With this change, the Income Tax department has practically put a restriction to maximum set off of loss under the head house property with other heads of income to Rs. 200000 in a particular year.

Let us see an example to understand how it works

Example:

Assume rental income from let out house property to be Rs 5000 p.m. Interest paid on Home loan is assumed at Rs 300000 in the FY.

Solution:

FY 2016-17FY 2017-18
Sl. No.ParticularsSelf Occupied HouseRented HouseSelf Occupied HouseRented House
ARental Income (Only for Rented House)060000060000
BLess: Deduction u/s 24 for Interest repayment on Home loan (Restricted to Rs 200000 in case of self occupied house)200000300000200000300000
CLoss under the head House Property (=A-B)200000240000200000240000
DMaximum amount allowed to be set off in the current FY (Restricted to Rs 200000 by Budget 2017)200000240000200000200000

Thus you could see that the from FY 2017-18 onwards, the max set off of loss from house property is restricted to Rs 200000 in a year.

Recommended: HRA Deduction under Income Tax

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