A home of your own is not just a roof over your head. It secures your family even financially. Lenders help us build that security through home loans. The government also understands the importance of its citizens having a home of their own and they promote the same in different ways. Tax benefit for your home loan is one such way. If you are planning to take a home loan or already have one and are exploring options to save tax on them, read on for specific details below.
Different types of income tax benefits on home loan
The EMI you pay every month towards repayment of your loan has two main components – interest and principal amount. The tax benefits for interest and principal payments differ. Below are a few tax deductions you can claim for the interest and principal you are repaying.
- Deduction on interest paid
This tax benefit option comes under section 24 of the income tax act. Here, you can claim a tax break for up to Rs 2 lakh on the interest you have paid towards your home loan.
- Deduction on interest paid during the pre-construction period
Sometimes, the construction of your house may finish only several months after you have been granted a loan. But the interest paid towards your home loan during this period can also help you save tax. This is called pre-construction interest and the limit here too is capped at Rs 2 lakh.
- Deduction of principal repayment
This is the provision that allows you to save tax on the principal amount you repay towards your home loan. Under section 80c of the income tax act, you can claim a tax benefit for up to Rs 1.5 lakh here. The caveat here is that you will not be able to sell the property for the first five years if you are claiming a tax benefit for the principal repayment. If you sell within this time period, the deduction claimed earlier will be added back to your income for taxation.
Making tax calculations easier
Since your EMI has two components, applying for tax benefits for both could become a bit difficult, especially when the ratio of principal and interest component changes continuously during the tenure of the loan. But a home loan tax benefit calculator is a helpful tool here.
How does a home loan tax saving calculator work?
Once you input details of your current loan or the loan you are planning to take, the calculator will give you an EMI breakdown for the whole loan tenure. Through this, you can know exactly how much of your EMI is going towards interest repayment and principal repayment. This can make both claiming tax benefits and planning your taxes easier.
Sometimes, the only thing that stands between you and a safe haven for your family is money, and home loans can help you tremendously here. Do your research, apply for a home loan today, and make your dream come true.