Are There Income Tax Benefits on Home Loans?

Income Tax Benefits on Home Loans: A Delhi resident planning to buy a flat in Chandigarh for investment purposes needs to consider several tax benefits under the Indian Income Tax Act. The tax deductions available depend on whether the buyer opts for the old or new tax regime, the occupancy status of the property, and the interest paid on the home loan.

Income Tax Benefits on Home Loans under the Old Tax Regime

If you choose the old tax regime, you can avail of two primary deductions related to your home loan:

1. Deduction on Principal Repayment (Section 80C): Under Section 80C, a deduction of up to ₹1.5 lakh is available on the principal repayment of the home loan. This deduction includes other eligible investments like Life Insurance Premium (LIP), Employee Provident Fund (EPF), Public Provident Fund (PPF), Equity Linked Savings Schemes (ELSS), and National Savings Certificates (NSC). This benefit is available regardless of whether the house is self-occupied or rented out.
2. Deduction on Interest Payment (Section 24(b)):
   • For Self-Occupied Property: If the house is for personal use, you can claim a deduction of up to ₹2 lakh per annum on the interest paid on the home loan.
   • For Let-Out Property: If the house is rented out, there is no upper limit on the interest deduction. However, you can set off losses under the head “Income from House Property” against other income up to ₹2 lakh in a financial year. Any unabsorbed loss can be carried forward for the next eight years to be adjusted against future house property income.

Tax Benefits under the New Tax Regime

The new tax regime does not provide a deduction for principal repayment under Section 80C. Additionally, for self-occupied property, no deduction is allowed on the interest paid on the home loan. However, if the property is rented out, the deduction on interest is allowed but is limited to the amount of taxable rental income received.

Investment Perspective: Self-Occupied vs. Let-Out

If you reserve the flat for personal use, the tax benefits under the old regime include:

• Up to ₹1.5 lakh deduction on principal repayment under Section 80C.
• Up to ₹2 lakh deduction on interest payment under Section 24(b).
• No tax benefits under the new tax regime.

If you rent out the property:

• You can claim the full interest paid on the home loan as a deduction (subject to the ₹2 lakh set-off limit per year for other income categories, with the excess carried forward).
• The rental income will be taxable after a standard deduction of 30%.

Disclaimer: 

For a first-time homebuyer investing in a rental property, the old tax regime offers substantial benefits through deductions on both principal and interest. If the property is let out, the interest deduction is more beneficial compared to self-occupation. However, those opting for the new tax regime should consider that most deductions are unavailable, which could impact the overall tax savings.

Carefully evaluating both regimes and occupancy status will help in maximizing tax benefits on your home loan investment.