Home Loan Tax Benefits

The Reserve Bank of India’s surprise move to hike the repo rate — the rate at which banks borrow from the apex bank in the overnight market — has had a ripple effect on financial markets. The 40 basis points (bps) hike to 4.40%, in an off-cycle policy meet on May 4, 2022, has unsettled prospective and current borrowers who are concerned about a rise in their loan rates and consequently, their monthly installments.

A major concern seems to be the hardening of interest rates on home loans following the apex bank’s decision to increase the key policy rate after four years. The last time the RBI changed the repo rate was a 40 bps cut in May 2020 to deal with the economic challenges posed by the Covid-19 pandemic-led restrictions. 

What’s good news for homebuyers is that tax benefits on home loans can cushion the impact of interest rate hikes on mortgages. Prospective home buyers need not be unduly worried about higher interest rates on housing loans after RBI’s surprise decision to hike the repo rate by 40 basis points (bps) to 4.40%. This is because home loans typically come with a bevy of tax exemptions and deductions — both on the principal amount and the interest paid every year — which if carefully calculated and claimed, will cushion or offset the effect of higher mortgage rates.

Home Loans Can Provide Tax Benefit

Home loans typically come with a bevy of tax exemptions and deductions — both on principal and interest paid every year — which allow borrowers to claim taxation benefits and deductions that can help offset the impact of higher loan rates or installments, if any. 

A careful reading of the income tax rules and tax benefits announced by the government to promote its mission of “Housing for All” may ensure that the hike in the policy rate does not translate into a pro-rata increase in interest rates on home loans. This is especially pertinent in the context of the Union Government’s aggressive push for affordable housing as envisaged under the Pradhan Mantri Awas Yojana (PMAY scheme). 

This is because of several reasons. Foremost is that mortgage loans typically come with a bevy of tax exemptions and deductions, which if carefully calculated and claimed, cushion the net impact of higher mortgage rates. Here is the lowdown on how the existing tax benefits on home loans could alleviate the possible effect of the rate hike on home loans.

Section 24 of the Income Tax Act

Under the existing Income Tax regime, there are provisions for housing loan customers to avail a bevy of tax benefits. The first among them is the room to deduct interest paid on housing loans by customers. 

Under this provision, customers can claim tax deduction as allowed under Section 24 of the Income Tax Act, provided the construction of the property is completed within five years of availing the loan. Customers can claim tax deduction of up to Rs 2 lakh per annum, unless the house is rented out.

Income Tax rules also allow borrowers to claim tax deduction on pre-construction interest payment on the loan amount availed. Under Section 24 of the Income Tax Act, tax deduction can be availed in five equal installments from the year in which construction of the property is completed, subject to the condition that the total Interest payment claimed for deduction does not exceed INR 2 lakh per annum.  

Section 80C of the Income Tax Act

Borrowers can also benefit from tax deduction on principal repayment amount provided that the property concerned is not sold within five years after the borrower takes possession. This benefit is allowed under Section 80C of the Income Tax Act, subject to a ceiling of INR 1.5 lakh per annum.

Section 80C of the Income Tax Act also provides for deduction of stamp duty and registration charges, up to a maximum of INR 1.5 lakh. This deduction can only be claimed in the year the charges are incurred.

Section 80EE of the Income Tax Act

Home loan customers can also get the benefit of interest deduction under Section 80EE of the Income Tax Act. As per the clause, additional interest deduction is allowed for certain affordable housing loans. Deduction of up to INR 50,000 can be claimed every year, over and above the deduction of INR 2 lakh permitted under Section 24 of the Income Tax Act. 

This benefit is subject to several conditions, wherein the overall loan amount should not exceed INR 35 lakh, the value of the house should not exceed INR 50 lakh, and the home buyer should not own any other property at the time of the loan sanction, or the borrower must be a first time home buyer. Further, the loan should have been sanctioned between April 1, 2016 and March 31, 2017.

Direct Tax Code Gains

Also under Section 80EEA of the direct tax code, additional interest deduction is allowed up to INR 1.5 lakh per annum. This is over and above the interest deduction of INR 2 lakh allowed under Section 24 of the Income Tax Act. 

However, availing of this benefit is subject to the stamp value of the property not exceeding INR 45 lakh, the home buyer not owing any other property on the date of the loan sanction, and the loan being sanctioned between April 1, 2019 and March 31, 2022. Further, the home buyer should not have availed interest deduction under section 80EE of the Income Tax Act.

Benefits On Joint Home Loan

There are a number of tax benefits for those who take a housing loan jointly, typically a husband and wife who are both salaried. The tax laws permit each co-owner to claim interest deduction of up to INR 2 lakh per annum. Besides, each co-owner can also claim principal repayment deduction of up to INR 1.5 lakh per annum. 

Tax rebates for multiple properties

There are also a number of tax benefits for those who own more than one residential property. One can claim tax benefit for up to two self-occupied houses, wherein interest deduction of up to INR 2 lakh and principal repayment relief of up to INR 1.5 lakh per annum can be claimed for both houses jointly. 

If one has more than two properties, then all other properties will be deemed as rented out and income from the rented property will be considered part of the house property income where municipal tax and standard deduction — the interest paid on home loan — is allowed for deduction.

How To Calculate Tax Deductions For Home Loan

To avail tax deductions in the case of multiple properties, home loan borrowers need to calculate the income earned from the residential properties. For this purpose, the borrower needs to evaluate the value of the property. This is nil in the case of self-occupied property, and equivalent to the rental income in case of a rented property. From this value, several taxes and costs are deducted which include municipal taxes paid, and standard deduction of 30% on the net annual value (gross value less municipal taxes). 

Claiming tax deductions on home loan

To avail these tax benefits, a home loan borrower needs to be aware of not only the tax deductions permitted under various clauses of the Income Tax Act, but also should be able to calculate such benefits accurately and claim them at the time of filing their annual Income Tax returns. 

For this, many documents are required. 

• One of the most important documents is the one showing ownership of the property and, if the property is jointly owned, then the amount of tax deduction based on the share of each owner in the property concerned. 
• Documents showcasing completion of construction or date of purchase of the property, details of borrowers indicating home ownership and housing loan documentation, and lender certification detailing the interest and principal components of the loan are also crucial. 

If salaried, the borrower should submit these documents to their employer and inform the employer about the loan details by submitting the interest and principal payment certificates so that they can adjust the tax deducted at source (TDS) accordingly. 

If the borrower is a self-employed person, they can claim eligible deduction while filing the Income Tax returns, under the relevant clauses.

Long Loan Tenure A Positive 

Any home loan is usually taken for 20 years, a reasonably long period. Even though customers intend to repay the loan early, data suggests that on an average, a home loan is repaid over an eight to 10-year period. In comparison, a typical interest rate cycle lasts for seven to eight years. Such a long loan duration means that a borrower usually experiences both ups and down in the rate cycle. In addition, these rate changes typically impact the tenor of the loan with most lenders not opting to change the EMI for the customer. In such a scenario, while the customer may experience an increase in tenor during an upswing in rates, they will also experience the inverse in a rate decline cycle.