Did you know that you get up to Rs 2.5 lakh tax benefit on home loans?

Unless you’ve won a lottery, or inherited a home, there is a good possibility that you need to take a loan to buy your house. The good part about a home loan is that it also offers you income tax benefit. In fact, it offers a benefit under two sections of the Indian Income Tax Act.

“A home loan equated monthly instalment (EMI ) is made of two parts. One is the principal while the second is the interest amount. You get tax benefit on both amounts,” said, Siddharth Gupta, co-founder, Gnbindia.com a home loan group buying portal.

As far as the principal amount goes you get a tax deduction under the Section 80 C, and up to a maximum of Rs 1 lakh. As far as the interest part goes, you get a tax deduction of up to Rs 1.5 lakh under Section 24 of IT laws. But there are a few important things to keep in mind here.

“The Rs 1.5 lakh limit on the interest amount is applicable when you’ve taken a loan for a self-occupied house. If it’s not a self-occupied house (rented out) you will get a tax deduction according to the actual interest amount you’ve paid towards the loan. Here there is not limit of Rs 1.5 lakh,” Gupta said.

Tax benefit on a home loan is an important benefit and if you’ve taken a loan ensure that you make the most of it by claiming the benefit.

“The principal amount qualified is under Section 80 C. So if you are someone who has EPF and can max out the principal amount on home loan under 80 C, you can use the remaining funds for better investments,” Kiran Teang said. After all once your Section 80 C quota is maxed out, your surplus funds are free to be invested in better finance instruments and your investments are not focused for tax planning only.

“Let’s say the principal and interest repayment on your home loan for a given year is Rs 2.4 lakh and Rs 3.5 lakh respectively. Now, under Section 80C, you can get a maximum tax deduction of Rs 1 lakh on principal repaid and under Section 24 you can get a tax break of up to Rs 1.5 lakh on interest repaid. However, if you and your spouse have opted for a joint home loan, you would collectively be able to claim a deduction of Rs 2 lakh and Rs 3 lakh on the principal and interest repaid,” said Adhil Shetty, CEO, Bankbazaar.com, an online loan portal.

So, in short if it’s a self-occupied house both can claim up to Rs 1.5 lakh under Section 24, while if you’ve given this house on rent there is no restriction on this amount. “The important things to keep in mind here is that in case of joint loan, the tax benefits will be according to the proportion of the loan,” said a chartered accountant with JP Chawala & Co.

So let’s assume that if the ratio of the loan is 70:30, for a loan of, say, Rs 1 crore. As per the ratio, Rs 70 lakh and Rs 30 lakh will be taken into account while calculating the tax deduction. “If it’s a self-occupied house and both one partner has paid say Rs 2.5 lakh as interest amount and the other partner has paid Rs 1.5 lakh, they both can claim up to Rs 1.5 lakh each. But, if the house is rented out then they can claim a deduction of Rs 2.5 lakh and Rs 1.5 lakh, respectively,” the CA said.

Many planners say that it’s a good idea to pre-pay the home loan. “But, you should keep in mind the tax benefits on the loan as well,” Telang said.

These are a few things you need to keep in mind about tax benefits on home loans. We suggest you talk to your chartered account or financial planners to know more about tax benefits for your specific case.