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How To declare Home Loan in Income Tax: A Step-By-Step Guide

By IIFL Home Loans | Published On Dec 18 2023 7:51 AM 1 min read 1042 views 403 Likes
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In the pursuit of owning a dream home, a housing loan emerges as a beacon of hope for many. It not only assists in turning the dream of having a house into a reality but also offers a silver lining in the form of tax benefits on home loans.

IIFL Home Loan offers a range of financial products and services that can enhance your experience of availing these tax benefits. Their expertise in home loans is complemented by tailored advice and solutions so that you make the most of the available tax deductions under various sections of the Income Tax Act.

Let's start!

Home loan borrowers can avail of tax deductions on both principal and interest repayments under Sections 80C and 24(b).

Advantages of Home Loans

When you take a home loan, it comes with the benefit of tax savings. There are two components of a home loan EMI: the principal amount and the interest charged on the loan. The Income Tax Act of India provides tax benefits on both these components, under different sections.

Let's understand this with an example.

Suppose you have taken a home loan for which the annual Equated Monthly Installment (EMI) comprises both the principal and interest components.

  • Home Loan Amount: ₹20,00,000
  • Interest Rate: 8% per annum
  • Loan Tenure: 20 years
  • Annual EMI: Approximately ₹1,90,000 (for simplicity, let's assume this remains constant throughout the year)

EMI splits into two parts: principal and interest.

Breakdown for One Year:

  • Total Annual EMI: ₹1,90,000
  • Interest Component (approx.): ₹1,40,000 (this varies but is higher in the initial years)
  • Principal Component (approx.): ₹50,000 (this increases gradually over the tenure)

Tax Benefits:

  1. Under Section 80C (Principal Repayment):
    • You can claim a deduction of up to ₹1,50,000 on the principal repayment.
    • In our example, the principal component is ₹50,000, which is well within the limit, so you can claim the entire ₹50,000.
  2. Under Section 24(b) (Interest Payment):
    • For a self-occupied property, you can claim a deduction of up to ₹2,00,000 on interest payment.
    • Since you paid ₹1,40,000 as interest, you can claim the entire amount as a deduction.

Calculating the Tax Savings:

Suppose you fall into the 30% income tax bracket.

  • Savings on Principal (Section 80C): ₹50,000 * 30% = ₹15,000
  • Savings on Interest (Section 24b): ₹1,40,000 * 30% = ₹42,000

Total Tax Savings for the Year: ₹15,000 + ₹42,000 = ₹57,000

Eligibility for Home Loan Tax Benefits

Before you can claim a tax deduction, it's crucial to understand the eligibility criteria. A tax deduction on home loan can be claimed if it is taken for the purchase or construction of a house.

Step-by-Step Guide to Claim Home Loan Tax Benefits

Step 1: Familiarise Yourself with the Applicable Sections

The Income Tax Act provides home loan income tax benefit under various sections:

  • Section 80C allows for a deduction on the principal repayment up to ₹1.5 lakh annually.
  • Section 24(b) provides a benefit on the interest paid on a home loan up to ₹2 lakh for a self-occupied property.
  • Section 80EE and Section 80EEA offer additional interest on home loan deduction for first-time homeowners under certain conditions.

Step 2: Document Collection

Gather all necessary documents, including the loan sanction letter, interest certificates from the bank, and proof of residence ownership and construction. These documents serve as official proof of your home loan details, interest payments, and property ownership, which are necessary when claiming tax deductions under various sections of the Income Tax Act.

Step 3: Compute Your Deduction

Calculate the total amount paid in the financial year towards the loan and segregate the principal and interest components, as they need to be claimed under different sections. Different sections of the Income Tax Act offer deductions on these components, and precise calculations ensure that you claim the maximum permissible deduction. This not only optimises your tax savings but also helps in maintaining compliance with tax laws.

Step 4: Declare Your Home Loan

Inform your employer about the loan to have the tax benefits on home loan accounted for in the TDS (Tax Deducted at Source) from your salary.

Step 5: File Your Income Tax Returns

While filing your IT returns (Generally, for individuals, the deadline to file the ITR is July 31 of the AY. Therefore, for FY 2023-2024, the ITR should ideally be filed by July 31, 2024), enter the principal amount under Section 80C and the interest under Section 24(b) or Section 80EE/80EEA as applicable. Ensure that you enter the correct figures to claim the home loan interest tax benefit.

Special Circumstances for Housing Loan Tax Benefit

  1. Joint Home Loan: If you have taken a joint home loan with a spouse or a family member, both can claim a deduction for the home loan interest and principal amounts separately, provided they are both co-owners of the property and contribute to the loan repayment.
  2. Pre-construction Interest: If your home loan is for a property under construction, you can claim pre-construction interest. This is allowed in five equal installments starting from the year in which the construction is completed.
  3. Additional Benefits: There are additional benefits under Section 80EE and Section 80EEA for first-time homeowners, which you can avail of based on eligibility.

Documentation and Verification

When claiming these deductions, proper documentation is critical. You will need:

  • The loan sanction letter and loan account statement.
  • The certificate from the lender for the interest paid.
  • Proof of the construction or purchase of the property.
  • In case the construction is not completed within five years, the housing loan interest deduction limit will be reduced to ₹30,000.

Over To You

Maximising the benefits of home loan deductions requires keeping track of the repayment schedule, ensuring timely and correct documentation, and staying updated with the latest tax laws. By following these steps and understanding the provisions of the Income Tax Act, you can effectively reduce your tax liability and make the most of your home loan. Remember to consult with a tax advisor for personalised advice, as tax laws are subject to change and can have nuanced implications based on individual circumstances.

To know more about the financial products and services, visit the official website of IIFL Home Loans.

FAQs

Q1. Can I claim a tax deduction for the full amount of my home loan interest payment?

No, you can't claim a deduction for the full amount of your home loan interest payment. There's a maximum limit set for how much you can deduct.

Q2. Is there any benefit available on the stamp duty and registration charges?

Yes, under Section 80C, you can claim the stamp duty and registration charges as a tax deduction, but this is within the overall limit of ₹1.5 lakh under this section and must be claimed in the year these expenses are incurred.

Q3. If I have a joint home loan, can both applicants claim a tax deduction?

Yes, if you have a joint home loan, both co-borrowers can claim a separate deduction for the home loan principal and interest amounts in their respective income tax returns.

Q4. Can I claim the tax benefit for home loan prepayment?

Yes, the amount paid towards prepayment qualifies for a tax deduction under Section 80C for the principal component. However, the deduction for the interest component on the prepaid amount can be claimed under Section 24(b) or Section 80EE/80EEA as applicable, subject to the prescribed limits.

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