Home Loan Tax Benefits: How To Save Tax Through Home Loan?

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For most people, a Home Loan is the most convenient way to finance a significant investment, like buying a house. The loan repayment process might seem overwhelming, but several tax advantages related to loans can result in financial savings. The tax benefits of ICICI Home Loans will be covered in this article, along with tips on reducing your tax burden.

Tax advantages for Home Loan interest

Among the various advantages of securing a Home Loan, one notable benefit is its tax incentives. Section 24 of the Income Tax Act of 1961 endows borrowers with an opportunity to subtract up to Rs 2 lakh worth of interest disbursements on their Home loans as deductions in taxes paid. In cases where properties are rented out for income generation, it also grants full deduction rights for all interests incurred on homes under consideration, which can then be deducted against rental revenues obtained by homeowners; nevertheless, this applies if you occupy the property and not others.

It’s important to note that the borrower may only take advantage of this home loan tax benefit after the house’s construction is complete, and possession has been transferred. Furthermore, if the borrower has a joint home loan, both borrowers can each claim a deduction of up to Rs 2 lakh if they are co-owners of the property.

Income Tax Benefits for Principal Repayment

Apart from getting tax advantages on the interest paid on your housing loan, you can subtract principal repayment as per Section 80C of the Income Tax Act. The maximum amount that one may claim is Rs 1.5 lakh per this section, but be mindful that only after completion and possession of property can one use this benefit to their advantage.

It’s important to remember that the principal repayment does not include any interest payments. Furthermore, if the borrower has a joint home loan, both borrowers may each claim a deduction of up to Rs 1.5 lakh as long as they are co-owners of the property.

Loans for home improvements are tax deductible

Under Section 24 of the Income Tax Act of 1961, you may deduct the interest paid on a loan for home improvements. Per this section, a maximum of Rs 30,000 can be claimed. However, a self-occupied property must be used as collateral for the loan, and it must be used to finance renovations, repairs, or other improvements to the home to qualify for this deduction.

Benefits from Taxation for Second Home Loan

With regard to the purchase of a home, you may be able to get a loan through a Home Loan broker. However, this benefit can be availed of only if the second property is not rented out, and you can claim a deduction of up to Rs 2 lakh under Section 24 of the Income Tax Act, 1961.

When utilising the home loan tax benefits, keep the following in mind:

  • Co-Owned Home Loan: Both the owners may claim separate tax benefits if you and your spouse take out a joint Home Loan. As a result, you and your spouse each have a limit of Rs 2 lakh that can be deducted from your Housing Loan interest payments. The principal repayment deduction for each of you is also deductible up to Rs 1.5 lakh. 

Even though tax benefits pertaining to Home Loan interest are only applicable upon completion of construction, any accrued interest before this point remains deductible. Such interest paid on loan amounts during the pre-construction phase is referred to as pre-construction interest and may be regained through five equal payments commencing in the year when the construction process ends.

  • Tax benefits for Joint Property: If you have a joint Home Loan with someone who is not your spouse, the two of you are only eligible for tax benefits if you are co-owners of the property. In this situation, you are eligible to deduct your share of the principal repayment and interest on your housing loan in accordance with your share of the property.
  • Tax advantages for loans against property: If you have taken a Loan Against Property (LAP) for any reason, including paying for your child’s education or marriage, you may also be able to deduct the interest you paid from your taxes. A deduction from your taxable income may be made for the tax benefit on LAP under Section 37(1) of the Income Tax Act.

Several additional home loan tax benefits include:

Claiming Tax Benefits on Multiple Properties

If you own more than one property and have taken Home Loans on all, you can still claim tax benefits on all the loans. The interest paid on all loans combined can only be deducted from your taxable income up to a maximum of Rs 2 lakh per annum. The tax advantages won’t apply to interest payments made over this threshold.

Top-up loans have tax benefits if you already have a Home Loan and need money for repairs or other expenses. The interest paid on the top-up loan might also be eligible for tax breaks if used for home renovation or repair.

Tax advantages for Home Loans on self-occupied and rented property

You can deduct up to Rs 2 lakh of the interest paid on a Home Loan for a self-occupied property from your taxes. However, if the property is rented out, there is no limit to the amount of interest that can be written off as a deduction from income.

Prepayment of Home Loans

You should be aware that if you choose to prepay your home loan with a surplus, there are no tax advantages on the returned principal amount. However, you can still claim tax benefits on the interest paid up to the date of prepayment.

Concluding

Tax benefits are a significant consideration when requesting a Home Loan. By understanding the various available tax benefits and structuring your finances appropriately, you can significantly reduce the amount of money you pay in taxes. Understanding various limitations and requirements associated with each tax benefit is essential for preventing unpleasant surprises when filing your taxes.

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