Homeowners in India can claim different deductions under the Income Tax Act, making home ownership more affordable and accessible. These tax deductions and benefits are available on the principal and interest component of your housing loan. Such benefits not only ease your repayment burden but also help in efficient tax planning. Let's take a closer look at those two deductions to really understand how principal and interest deductions could be beneficial for you.

What is the Tax Benefit on a Home Loan?

A tax benefit on a home loan refers to the deductions available to borrowers who have taken a loan to buy, build, or renovate a house. It reduces your taxable income and overall tax outgo. The principal repayment and the interest paid on your home loan qualify for different sections under the Income Tax Act.

Home Loan Principal Tax Benefit

The principal portion of your home loan EMI is eligible for a deduction under section 80C of the Income Tax Act. You can claim a maximum deduction of up to ₹1.5 lakh during each financial year paid towards the principal. However, you can only claim the benefit if the construction of the house is completed and you have received possession. You also need to remember that the ₹1.5 lakh is the cumulative limit for all financial tools eligible for tax deduction u/s 80C.

Home Loan Interest Deduction

The interest paid on your home loan is eligible for a deduction under Section 24(b). For a self-occupied property, you can claim up to ₹2 lakh per year. As for a rented property, there is no upper limit on the amount of deduction. If, for example, you have paid ₹2.5 lakh in interest, you will get the entire amount if the property is let out. This provision makes property investment an attractive choice for homeowners who don’t intend to stay in the home and would rather rent it. In addition to this, you can also claim a deduction of up to ₹50,000 and ₹1.5 lakh u/s 80EE and 80EEA respectively. However, this is only applicable if the loan is within a certain period. You can also maximise the interest deduction if you have a joint loan as both applicants can claim the deduction.

Using a Home Loan Tax Saving Calculator

A home loan tax saving calculator enables you to roughly calculate the amount of income tax you can save using these deductions. You simply provide a few details like loan amount, loan tenure, interest rate, and property type. The calculator quickly shows your possible annual tax savings and assists overall planning for your finances. It’s an effective and straightforward benefit to see a visualisation of your real tax value before submitting your tax returns.

Eligibility Criteria for Tax Benefits

• Property type: Applicable for self-occupied or rented residential properties.
• Loan source: Must be availed from recognised financial institutions.
• Borrower type: Both first-time and existing homeowners can claim benefits.
• Possession rule: Deductions apply only after property possession and EMI payments begin.

Tips to Maximise Tax Benefits on Home Loan

• Prepay interest wisely: This is recommended for those who want a short-term benefit of tax deductions.
• Use the co-borrower option: If the loan is with a co-borrower, the tax benefit can be doubled.
• Combine deductions smartly: Tax deductions can also be benefited by combining the principal repayment with other Section 80C investments.
• Be prepared with documents: For verification, keep your loan statements, receipts and interest certificates ready.

By knowing the difference principal and interest deductions, you can maximise the tax benefits available for home loans u/s 80C and 24(b) and increase the overall savings that come from these tax deductions.

Use online calculators and ensure correct documentation to never miss out on a tax savings opportunity. Financial institutions like PNB Housing offer online EMI calculator that helps you understand your repayment structure and effectively utilise the home loan tax benefit.