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Understanding the Tax Benefits on Home Loan Properly

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The Union budget for the financial year 2019, proposed an increase of Rs. 1.5 Lakh in the tax benefits applicable to home loan interest. With this new proposal, borrowers can now claim a tax deduction up to Rs. 3.5 Lakh. The proposal can be looked at a means to encourage individuals to avail a home loan to finance their dream house.

Most borrowers focus their attention on the principal loan amount offered by the lender and the rate of interest charged on the same. They completely overlook the home loan tax benefit components associated with both the principal amount and payable interest on the loan.

Here’s a list of tax benefits that borrowers need to know about saving tax before applying for a home loan –

  • Section 80 C – Exemption on principal repayment

Borrowers can avail an exemption up to Rs. 1.5 Lakh on their taxable income on the principal amount repaid in a year. It may include the registration charges and stamp duty on a home loan but can be availed only once and should be availed in the year the expense was incurred.

The tax benefit under this section is allowed once the construction is complete and certification is offered. Also, the borrower cannot claim exemptions if they sell the property within 5 years of its purchase. In such cases, the benefit claim will be added back to their income tax on the year of sale.

In the case a home loan is jointly availed, each borrower is entitled to a tax benefit. The exemption allowed on payable interest is up to Rs. 2 Lakh, while that on principal amount is up to Rs. 1.5 Lakh. But to avail this tax benefit, the borrowers should be co-owners of the property in question.

  • Section 24 (b) – Exemption on interest

Under this scheme, borrowers can enjoy exemption up to Rs. 2 Lakh on the amount that is to be paid as interest. The said home loan tax benefit is only applicable to those properties whose construction has been completed within 5 years.

In case the construction is completed within this specific period, a borrower can claim only up to Rs. 30,000. No exemption is allowed on the home loan interest that is paid before the completion of reconstruction or repair of the said property.

If the property is not occupied by the borrower and rented out, the income from rent is deducted from the interest paid and exempted from the tax.

  • Sec 80 EE- Exemption on interest

Most borrowers tend to confuse the tax benefit that is offered under Sec 24(b) with those provided under Sec 80 EE. While the former is offered on the interest accrued on a home loan, the latter is offered to the first-time borrowers.

Borrowers can avail an additional exemption of Rs. 50,000 on the payable interest amount accrued by the end of each financial year.

They can enjoy the exemption offered under this scheme if the home loan amount they have applied for is not more than Rs. 35 Lakh. Also, the property’s worth has to be within Rs. 50 Lakh.

To know which home loan tax benefit for the property will be applicable for you; you need to first find out the payable interest that will be accrued on your loan amount.  NBFCs like Bajaj Finserv offer a home loan EMI calculator that not just calculates EMI but also helps find out the payable interest on the loan amount.

Besides availing a home loan tax benefit, borrowers may also consider the option of a home loan balance transfer to further reduce the tax burden on their loan through the several benefits of a home loan balance transfer.

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