How to calculate income tax benefits on home loan EMIs — explained

With skyrocketing prices of houses, an average person can't buy a house without taking a home loan. In this article, we will discuss various aspects of tax benefits available for home loans.

Deductions available under Section 80C for home loans?

A tax benefit is available in respect of repayment of principal amount under section 80 C up to ₹1.50 lakh along with other eligible items like life insurance premium, EPF, ELSS, PPF, school fee, etc. This deduction is available only in respect of the purchase or construction of a residential house for a home loan taken from specified entities like banks, housing finance companies, central government, state government, etc. These benefits can be claimed even in respect of part or full prepayment of home loans made during the year.

Deduction in respect of interest paid

You are also allowed to claim a deduction in respect of interest paid on money borrowed for the purchase, construction, repair, and reconstruction of the property under Section 24(b). The amount of deduction depends on whether the property is self-occupied or is let out. 

In case the property is self-occupied you are allowed a maximum deduction of ₹2 lakh for a maximum of two self-occupied house properties taken together.

However, in case the property is let out, you are allowed to claim a full deduction for interest paid but you are allowed to set off a loss under the house property head only up to ₹2 lakh against other taxable income. The loss remains unabsorbed during the current year under the house property head and is allowed to be carried forward for set off against house property income in eight subsequent years.

Please note that the benefits in respect of interest payment are available in respect of interest paid on money borrowed for purchase, construction, repair, renovation, etc. This benefit is available concerning residential as well as commercial properties. Moreover, unlike deduction under Section 80C for repayment of the principal repayment of a home loan where the home loan needs to be taken from specified entities, deduction under Section 24(b) is available concerning money borrowed from anyone including your friends and relatives.

Also Read: How the profits on sale of inherited shares will be taxed?

Deduction in respect of interest and EMIs paid during the construction period

In respect of interest paid during the construction period, which is called Pre EMI interest 1/5 of the aggregate interest paid during the construction period can be claimed in five financial years beginning from the year in which the construction is completed and possession taken.

The aggregate deduction including interest paid for the year will be restricted to ₹2 lakh for a year for a maximum of two self-occupied properties. However, if you pay EMIs during the construction period, there is no provision for claiming a deduction in respect of the principal component comprised in such EMIs.

From which year can we claim a deduction in respect of the home loan?

Both these deductions are available from the year in which you take possession or when the construction is completed in case you self-construct the property. You can claim the deduction for the full year of interest and repayment even if you have taken possession on the last day of the financial year.

How the tax benefits in respect of joint home loans can be claimed?

In respect of joint home loans both the borrowers can claim the deduction provided both are joint owners as well as co-borrowers. So in case you are paying the EMI being a borrower but are not joint of the property, you cannot claim a deduction for a home loan. The amount of deduction available will depend on the respective share of each co-borrower in the home loan.

The share of each borrower in the home loan can be different from their share of ownership in the house property. This ratio gets fixed at the time of purchase of the property and cannot be changed later on generally.

All the joint owners are treated as full-fledged owners in respect of their share in the property and each one can claim the deduction as if he is the full owner in respect of his share in the interest and principal repayment.

When can the tax benefits claimed earlier be reversed?

The tax benefits claimed by you under Section 80C get reversed if you transfer the house property within five financial years from the end of the year in which the possession of the property was taken. So even if you gift the property before the completion of five years from the end of the financial year in which possession was taken, all the benefits claimed under Section 80, earlier are reversed.

There is no similar provision for the reversal of tax benefits claimed in respect of interest under Section 24(b) in the future even if you sell the property within five years. There is no provision for reversal of tax benefits claimed if you prepay the home loan in the future.

Can I claim these home loan tax benefits if I opt for a new tax regime?

If you opt for a new tax regime, you are not allowed to claim any deduction for interest paid in respect of self-occupied house property as the annual value of the self-occupied house property is taken as nil. However, in respect of let-out property, you can claim a deduction in respect of interest paid only up to the taxable amount of rent after a deduction of 30% of the standard deduction, as you are not allowed to claim set off of losses under the house property income against any other income during the year under the new tax regime. You are also not allowed to carry forward any loss under the house property under the new tax regime.

The writer is a tax and investment expert and can be reached at jainbalwant@gmail.com and @jainbalwant on X.