Income Tax benefits on home loan: Prepayment, co-borrowing, loan tenure and other ways to maximise tax savings when purchasing a home

Owning a house is not just a significant milestone but also a smart investment decision, which can result in saving a substantial amount on Income Tax. There are several deductions allowed under different sections of Income Tax Act, 1961. Payments towards home loan interest in a financial year can help you save some amount on your total tax liability. The principal paid for home loan is also eligible for income tax deductions.   

Let’s look at a few strategies for maximising income tax savings when purchasing a house with a home loan.

Tax deductions on principal repayment

When you pay the principal component of your home loan, you can avail of a tax benefit under Section 80C of the Income Tax Act. This benefit includes the principal repayment, stamp duty, and registration charges, and it can be availed up to a maximum of Rs 1.5 lakh per annum. However, to avail of this deduction, you must retain ownership of the property for at least five years.

Home loan interest payment deductions

In addition to the principal repayment, tax deductions are also applicable on the interest paid on your home loan. Section 24 of the Income Tax Act allows for deductions of up to Rs 2 lakh for a self-occupied property on the interest paid for home loan. For a let-out property, there is no upper limit on the deduction for the interest paid.

Longer tenures

As most of the home loans generally come with a longer tenure, it can provide a tax benefit in the sense that it allows you to claim tax deductions on your home loan interest payments for the entire duration of the loan repayment. Under Section 24 of the Income Tax Act, homeowners can claim a deduction of up to Rs 2 lakh per annum on the interest portion of the home loan EMI for a self-occupied property. So, a longer loan tenure means that you would be paying interest (and thus, claiming this deduction) over more years, which can lower your taxable income and hence, your overall tax liability for that longer period.

Co-borrowing

Additionally, if you are co-borrowing with your spouse then both of you can claim up to Rs 1.5 lakh per annum in deduction from principal repayment and Rs 2 lakh each towards interest payments. So, this can double the income tax deduction amount.

Additional interest deductions

In specific scenarios, homeowners can also avail of additional interest deductions. Under Section 80EE of the Income Tax Act, an additional deduction of up to Rs 50,000 is available, subject to certain conditions. Similarly, Section 80EEA provides for a further deduction of up to Rs 1.5 lakh, again under specific conditions.