How to Save Tax when Buying a Home

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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. There are also some expenses that 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.

The components of a home loan EMI

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 across 20 years. In that case - 

  • Your total home loan interest would be ₹40,29,824
  • The monthly EMI would be ₹33,458

The EMI consists of the principal and the interest. And each of these components comes with its own income tax relief for home buyers.

Tax benefits your home loan principal gives you

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 fulfil the following basic conditions - 

  • The deduction is allowed only after the property has been constructed
  • The loan should be taken for buying or building your house (alternations, renovations etc. are not covered)
  • You should not sell the house property within 5 years of possession

The limit also includes any other investments eligible for deductions under section 80C like life insurance premiums, PPF investments, 5-year tax-saving FDs among others.

Tax benefits your home loan interest gives you

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. 

Benefits under Section 24:

In 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 case of a rented property). 

Benefits under Section 80EE:

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? 

  • Your home loan amount should not exceed ₹35 lakh
  • The value of your house should not exceed ₹50 lakh
  • You should have availed the loan between April 1, 2016 and March 31, 2017

Benefits under Section 80EEA:

Missed 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:

  • The stamp duty value of the house should not exceed ₹45 lakhs
  • You should have availed the loan between April 1, 2019 and March 31, 2021

A quick illustration before we wind up

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 - 

  • Your total home loan interest would be ₹40,29,824
  • The monthly EMI would be ₹33,458

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 - 

  • Home loan principal - ₹84,546.62
  • Home loan interest - ₹3,16,944.58

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. 

Particulars

Taxability in case you have no home loan

Taxability in case you have a home loan

Salary 

₹10,00,000

₹10,00,000

Income from house property

(self-occupied house)

Nil

Nil

Deduction u/s 24 for home loan interest

Nil

(₹2,00,000)

Income from other sources

₹1,00,000

₹1,00,000

Gross total income

₹11,00,000

₹9,00,000

Deduction u/s 80C for home loan principal

Nil

(₹84,546)

Total taxable income

₹11,00,000

₹8,15,454

Tax on the income 

(calculated as per old regime)

₹1,48,200

₹78,614

Tax on the income 

(calculated as per new regime)

₹98,800

₹98,800

Tax savings as per old regime

₹69,586


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.

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