Tax savings on interest and principal repayment on home loans are some things that homebuyers take into account while deciding to buy a house. However, according to financial planners, tax benefits should not be among the primary reasons for buying a house. Having said that, any savings are always welcome. While anyone who buys a house with a home loan can claim tax benefits on repayment of the loan, there is an additional tax benefit for the first-time homebuyers. Here’s more about the tax benefit on home loan repayment.
You can claim tax benefits on home loan for both principal repayment and the interest paid. Principal repayment qualifies for tax deduction under section 80C of the Income-tax Act, 1961. However, there are other things such as life insurance premiums, investment in Public Provident Fund, and children’s education fee; which qualify for deduction under the same section and the overall limit of Rs1.5 lakh. Apart from principal repayment, you can claim deduction of up to Rs2 lakh for interest payment on home loans under section 24(b) of the Act.
However, if you are a first-time homebuyer, you can claim additional tax deduction of up to Rs50,000 per financial year under section 80EE of the Act, provided you fulfil certain conditions.
This section was first proposed in the Union Budget 2013-14, and was initially meant to be in force for 2 years only (financial years 2013-14 and FY 2014-15). However, since FY 2016-17 it has been made a regular feature. There are some criteria that homebuyers need to fulfil to claim this deduction. The home loan should have been sanctioned during or after FY 2016-17. The loan amount should be less than Rs35 lakh and house value should not be more than Rs50 lakh. Apart from that, the homebuyer should not have any other existing residential house in her name while buying the house. That means, even those who have had a house earlier, but do not have a house while buying the new one and fulfil other criteria, can benefit of this scheme. Also, only an individual taxpayer can claim tax deduction under this section, and it is not available to a Hindu Undivided Family (HUF), Association of persons (AOP) or a company.
Remember, if you claim deduction for principal repayment of home loan, regardless of whether you are a first-time homebuyer or not, you should not sell the house within 5 years from the date of possession. Doing so will revoke the tax benefit claimed by you and you will have to include all those benefits in your income, in the year you sell the property, and pay taxes on it as per your income tax slab rate.