Every year, during the tax filing season, people look for different ways to reduce their annual tax payments. And, if you have availed a home loan, you can enjoy different tax benefits. Read on to know more about it.
Buying a home requires a significant investment, and it could be one of the most important financial decisions you may take. If you wish to apply for a home to fund the purchase of your dream home, it is vital to plan your finances well so that you can repay the amount without any hassles.
But, financial planning for availing home loans is not limited to making arrangements for funds but also taking advantage of home loan tax benefits. When you borrow, you are entitled to get various tax benefits under different sections of the IT (Income Tax) Act. So, without any further ado, let us look at the tax benefits you can avail and reduce your annual tax liability.
Tax benefit of repayment of principal amount
When you repay the home loan in EMIs or equated monthly instalments, a major portion of the amount goes towards repaying the principal amount during the last few years of the tenure. As such, the amount is eligible for tax deduction, which means you can reduce the same from your annual tax payment.
You can claim a maximum deduction of Rs. 1.5 lakhs in a financial year under Section 80C of the IT Act. However, you must know that to claim this deduction, you meet the following conditions:
- You must not sell the property within five years from the date of registration.
- If you sell the property within five years, the tax benefits you availed last year will be reversed and added to your income under the ‘gains from a property sale’ head. And, the amount becomes taxable as per your usual tax bracket.
Tax benefit on repayment of interest amount
The EMI you repay to the lender towards home loan consists of both the principal amount and the interest component. During the initial few years of the loan tenure, a major portion of the EMI amount goes towards repayment of the interest.
It is, therefore, vital that you compare the interest rate from different lenders and choose the one that offers the lowest interest so that the EMI is affordable. Even a small difference can make a huge difference in the total savings you get in the long-run.
While you can compare and get the best offer, you can also claim tax benefit up to a maximum limit of Rs. 2 lakhs on interest repayment under Section 24 of the IT Act.
If you have a home construction loan, you can avail the tax benefit on interest repayment only from the year in which the construction is completed.
Tax benefit on stamp duty and registration charges payment
When you purchase a home, you are obliged to pay certain legal charges like the stamp duty and registration charges. These fees are levied by the government of Indian, and it is an integral part of the home buying process.
These charges can be a significant amount, and it can increase your overall loan cost. However, you can avail tax benefits on these charges. The tax benefit on registration fees and stamp duty is covered under Section 80C of the IT Act. You can claim this tax benefit only once in the year of registration.
Now that you are aware of the tax benefits, take advantage of these deductions and reduce your tax liability.