Each financial year, as March 31 rolls around, you may have heard one common piece of financial advice dished out by experts. Here’s how it goes -
Invest to save tax.
Well, they’re right. Investing in some schemes and products can help you save on tax. But here’s a secret. Some expenses can reduce your tax burden. And top among these is buying a house, and if you've finally gone through the rent vs buy debate and decided to choose the latter, your next big challenge is figuring out your taxes.
The Income Tax Act contains many provisions that can help you save taxes while buying a house in India. If the steep costs of home ownership have been giving you sleepless nights, then here’s the relief and respite you need.
Let’s go through the income tax relief for home buyers, so you can save money even as you get one step closer to owning the house of your dreams.
When you borrow a home loan, you can take your time and repay the money over 10, 20 or even 30 years. The price for this is home loan interest.
So, say you’re borrowing around ₹40 lakh at an interest rate of 8%, and you plan to repay it over 20 years. In that case -
The EMI consists of the principal and the interest. And each of these components comes with its own income tax relief for home buyers.
Section 80C of the Income Tax Act is a national favourite - because it offers a ton of tax benefits on investments and expenses. Your home loan principal is also a part of this section.
The total amount of home loan principal that you’ve repaid in a year can be deducted from taxable income, up to ₹1.5 lakh. But if the principal component of your home loan EMIs exceeds ₹1.5 lakhs during the year, your deductions will be limited to this sum.
To claim this tax benefit, you need to fulfill the following basic conditions -
The limit also includes any other investments eligible for deductions under section 80C like life insurance premiums, PPF investments, and 5-year tax-saving FDs among others.
The home loan interest may seem like a huge financial burden initially. But once you know how it can help save taxes while buying a house in India, you’ll be relieved.
Let’s begin with the good news - home loan interest offers tax benefits under multiple sections of the Income Tax Act.
In the case of a self-occupied house, you can claim a deduction of up to ₹2 lakh for the home loan interest component. But if you plan to rent out the property, or the house is deemed to be let out because you already occupy another house, there is no limit on the amount of deduction you can claim.
In other words, if your total home loan interest you repay during the year comes up to ₹3 lakhs, you can deduct the whole amount to reduce your taxes (in the case of a rented property).
If you’re a first-time home buyer, there’s more good news. The Income Tax Act has a provision that offers tax benefits to first-time home buyers in India. We call it section 80EE - according to which you can claim an extra ₹50,000 of your home loan interest as a deduction.
The caveat?
Did you miss the window to benefit from section 80EE of the Income Tax Act? Well, maybe section 80EEA can be of help. Also for first-time home buyers, this section offers tax deductions on home loan interest to the tune of ₹1.5 lakh. This is in addition to the benefit under section 24.
But there are no free lunches. And section 80EEA also comes with its own conditions:
Here’s an example that explains the tax benefits of buying a home in India. Let’s say you borrow around ₹40 lakh at 8% interest, and you’ll repay it over 20 years. As we saw earlier, here’s how your total costs would pan out -
Let’s take the case of the first year during which you repay your loan. During this year, here’s what the components of your home loan EMIs would add up to -
And now, for the big reveal. Here’s how you can save taxes while buying a house in India - all thanks to your home loan. For the purpose of this example, let’s assume you are a first-time home buyer, and that you live in the house you have purchased.
See how a home loan offers income tax relief for home buyers. Go through a simple home loan guide to have a basic idea about what will be needed of you when you apply for home loans. The numbers speak for themselves. And now that you know the provisions of the Income Tax Act, make sure you use them to reduce your tax burden.
Buying a home is not only a dream for many people but also a smart way to save tax. There are various tax benefits available for home buyers, such as deductions on interest payments, principal repayments, stamp duty, registration fees, and home improvement expenses. These tax benefits can reduce the overall cost of owning a home and increase the savings of home buyers. However, to avail these benefits, one must follow the rules and regulations laid down by the Income Tax Act and the relevant authorities. By doing so, one can enjoy the dual benefits of owning a home and saving tax.
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Gross investment is the total amount invested without considering depreciation, while net investment deducts depreciation from gross investment. Gross investment measures the total investment, while net investment measures the change in capital stock.
When it comes to buying a home, gross investment refers to the total amount spent on the property, including the purchase price and any renovations made. Net investment, on the other hand, takes into account the depreciation of the home over time. To calculate net investment, you would subtract the depreciation of the property from the gross investment. Net investment in a home is important in determining the actual increase or decrease in value over time.
