Is Home Loan Interest Tax Deductible?

Taking a home loan can be considered as one of the biggest financial decisions of most people. But looking at the total interest expense which is likely to be paid over the entire period of the loan, the amount could be quite significant. Of course, many ask whether the interest paid on home loans is a tax-deductible expense and may help reduce the actual tax liability. Let’s look at this in more detail.

One important aspect concerning home loans that must be discussed here is the Tax Deduction on Home Loan Interest

The good news is that the interest part of your home loan EMI is tax deductible under section 24 of the Income Tax Act of India, however, certain conditions do apply. This goes a long way in reducing the amount of taxable income in your account by helping to offset the expenses.

This is because in order to claim tax deduction, the home loan has to have been availed to purchase or construct residential house property. This should be in the name of the taxpayer claiming the deduction or in the name of spouse/kids. Moreover, the taxpayer s should not own more than two house properties.

Deduction Calculation and Limits

You can avail deduction on interest paid on pre construction interest, interest during construction and on the home loan taken after getting the possession. Interest expenses can be claimed under deduction in the year of reckoning.

The maximum limit of tax exemption on the house property is Rs 2 lakh in a year. This overall limit encompasses both principal and interest component of the loan.

Within this, deduction on home loan interest is allowed only for self-occupied house property up to Rs 2 lakh, and in the case of let-out property, the deduction is restricted to Rs 30,000.

Hence, in case of a single home loan for a self-occupied house, you can offset the entire interest paid or Rs 2 lakhs whichever is lower. And all principal repayment allow for deduction up to the extent of Rs 2 lakh in aggregate.

Extra Concessions for the First Time Home Buyers

To give a boost to affordable housing, an incentive above Rs 2 lakh has been given for first-time home buyers availing home loans during the financial year 2020-21. This additional relief of up to Rs 1. 5 lakh is available for loans availed till March 31, 2022.

Here, this additional deduction should be for house property and the value of the house should not exceed Rs 45 lakh in metro cities or Rs 40 lakh in other places. Besides, it further improves the overall deduction to Rs 3. 5 lakh for first home buyers in such cases.

The following are Key Points when claiming a deduction:

Here are some key things to note when claiming a home loan interest deduction:

• The house construction should be completed within 5 years from the end of the financial year when the loan was taken

• The deduction can only be claimed once construction is complete

• For pre-construction period interest, the deduction can be spread equally over 5 years or deducted fully in the year of completion.

• For pre-construction interest expenses, a certificate from the lender is mandatory.

• Likewise, co-applicant spouse can also claim the deduction for their income share if he/she has documentary proof.

Another factor that affects the deduction is a change in circumstances that affects the computation of the income.

They conclude that your home loan interest deduction is also influenced by external factors that, if altered, will affect the benefits.

For example, if the property becomes let out, the deduction limit drops from Rs 2 lakh to just Rs 30,000. Likewise, if you have found yourself with more than two house properties, you will lose the deduction. Another condition that affects deduction is the transfer of the property before 5 years of acquisition or the carry forward of the construction period beyond 5 years.

Litigation pending on some of these aspects has also raised uncertainty for taxpayers. The decision on such matters is still unclear depending on the results of such court cases that may still be pending.

To Conclude

Current tax provisions do offer significant tax relief on home loan interest payments. This can lower tax outgo substantially, especially in initial years when the interest portion in EMIs is larger. End-use conditions must be preserved and supporting documentation to facilitate the process of claiming for the deduction in every fiscal year. However, other factors are outside the campus's work and may also change your eligibility. Therefore, the following factors should be taken into account while planning your financial future.

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