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Look At The Break-Up Of Your Home Loan EMI Carefully To Maximize Deduction

Before you leap on to make fresh tax saving investments, you should first look at the expenses that qualify for deductions. One such expense is repayment of a home loan. If you are a salaried individual in the highest tax bracket of 31.2% (including cess, but excluding surcharge) you can reduce your tax outgo by as much as ₹1.56 lakh by claiming all the deductions available against repayment of a home loan.

The equated monthly instalment (EMIs) of a home loan has two components—principal and interest—which qualify for separate deduction.

Deduction on principal

Under Section 80C, you can claim a deduction of up to ₹1.5 lakh on repayment of the principal component. If you claim full deduction, you would save up to ₹46,800 per annum.

Typically, at the beginning of the loan tenure, the principal component is lower. So look at the provisional loan break-up statement at the beginning of the year carefully.

Deduction on interest

There are three different Sections under which you can claim deduction for the interest component.

Section 24(b): Under this Section, you can claim a deduction of up to ₹2 lakh. There are no restrictions related to the amount of loan taken or the value of the property. If you claim full deduction, you will save up to ₹62,400 per annum.

Section 80EE: This deduction is available only to first-time homebuyers. If so, you can claim additional tax deduction of up to ₹50,000 per financial year under Section 80EE, provided you fulfil certain conditions: the loan should have been sanctioned during or after FY17, the amount should be less than ₹35 lakh and the value of the house should not exceed ₹50 lakh. If you claim the full amount, you will save up to ₹15,600 per year.

Section 80EEA: This Section was introduced in Finance Bill 2019 and is available for claim from assessment year 2020-21. You can claim up to ₹1.5 lakh under Section 80EEA. If you don’t exhaust the entire interest payment component by claiming deduction under Section 24(b), you can claim deduction for the remaining interest paid under 80EEA provided you fulfil certain conditions: the loan should have been sanctioned during FY20, the stamp duty value of the house should not be more than ₹45 lakh and you should not own any other residential house on the date of the sanction of loan. If you make the full claim, you will save up to ₹46,800.

Remember that if you claim deduction under this Section, then you won’t be eligible to claim deduction under Section 80EE. So the maximum amount that you can claim as deduction against interest payment of home loan is ₹3.5 lakh.

Keep in mind

While there is no lock-in period for deduction claimed against interest payment under Sections 24(b), 80EE or 80EEA, Section 80C stipulates that if you sell your house within five years from the purchase or date of possession, the deduction claimed on principal repayment in the previous years will get revoked. In this case, all such deductions claimed will be clubbed with your income in the year of sale for taxation.

Main SourceLivemint