Home Loan Tax Benefits – How much do You Really get?

In India, home loans come with tax benefits. You already know that.

And there is no denying that these tax benefits make it all the more attractive to buy property using home loans.

But time and again I have seen people overestimating these tax benefits. Why?

Because the tax benefits available on home loans are capped. So depending on the home loan they take, the actual benefit may not be as large as what many borrowers think.

Now there are 2 components of a home loan – principal and interest. And the home loan EMI also has the same two components – (i) principal repayment, and (ii) interest payment.

So what tax benefits are available for Home Loan borrowers that can reduce their tax outgo?

  • Deduction of up to Rs 1.5 lac for principal repayment under Section 80C of the Income Tax Act.
  • Deduction of up to Rs 2 lac for interest payment for self-occupied property under Section 24 of the Income Tax Act. The interest payment of up to Rs 2 lac is available as loss under income from a let out property
  • Additional deduction of Rs 50,000 on interest payment, over and above the deduction claimed in Section 24 is available for the first time home buyers under Section 80EE.

Tax Benefits on Home Loan Principal Repayment

A deduction of up to Rs 1.5 lac is available for principal repayment of home loans under Section 80C of the Income Tax Act.

There are few things to note here.

First, Section 80C’s tax savings are also applicable on your investments in EPF, PPF, ELSS (Equity Linked Savings Scheme) and expenses like insurance premiums, school fee, etc.

So all these investments and expenses compete with home loan principal repayment for the Section 80C benefits. Chances are high that the sum of EPF + PPF + ELSS + insurance premiums + Home Loan Principal repaid will be higher than Rs 1.5 lac. If that’s the case, the cap of Rs 1.5 lac in Section 80C limits the benefit to just Rs 1.5 lac irrespective of what you claim from within EPF, PPF, ELSS, premiums or home loan principal repayments.

Even if you have a big loan and are repaying more than Rs 1.5 lac of home loan principal, the tax benefit is limited to just Rs 1.5 lac.

Tax Benefits on Home Loan Interest Payment

Deduction of up to Rs 2 lac is available for interest payment for self-occupied property under Section 24 of the Income Tax Act. And the interest payment of up to Rs 2 lac is available as a loss under income from a let out property.

This is where things get interesting and people get confused.

Due to the above-mentioned capping of benefit, even if you are paying more than Rs 2 lac interest in a given financial year, the excess interest above Rs 2 lac will not fetch you any tax benefits.

Here is a small example:

Suppose you take a Rs 35 lac home loan for 20 years at 9.5%. You EMI will be Rs 32,625 per month (read more about how home loan tenure impacts interest paid).

Home Loan Tax benefit Section 24

As you can see, in total Rs 3.91 lac is paid in EMIs in 1st year. Out of this, principal forms only Rs 61,633 whereas interest is Rs 3.29 lac. Out of this Rs 3.29 lac, only Rs 2 lac is eligible for tax benefits under Section 24. The remaining amount (can be seen in red-colored text) cannot get tax benefits.

The home loans are structured like this that during initial years, a major part of your EMI goes towards interest payment. So it’s possible that the interest you pay in the initial years will be much higher than Rs 2 lac (the limit for tax benefit).

Let’s take another example to find out another interesting aspect.

We compare two loans. First of Rs 25 lac and the second of Rs 50 lac. The loan tenure and interest rate on both are 20 years and 9.5% respectively. The EMIs are Rs 23,303 (for Rs 25 lac home loan) and Rs 46,607 (for Rs 50 lac home loan).

Now have a look at the table below:

Home Loan Tax benefit comparison Section 80 Section 24

For the Rs 25 lac loan, the interest part that misses out on tax benefit is very small (Rs 35,616 in the first year and goes on reducing). But for the Rs 50 lac loan, you initially pay Rs 4.71 lac as interest in the first year. This is much more than the Rs 2 lac per year limit. So you only get the tax benefit on Rs 2 lac of interest (under Section 24). The remaining Rs 2.71 lac doesn’t get any tax benefit.

And if you focus on the table (on right) of Rs 50 lac loan, you will see that you keep having an interest component that misses out on tax benefits till the 15th year. And more interestingly, during the first 7 years of loan repayment, the tax benefit on interest payment of Rs 25 lac loan is the same as tax benefit on Rs 50 lac loan!

So much so and hue and cry for home loan tax benefits. 🙂

This is all the more reason why one needs to look at the tax angle when planning to prepay home loans. And if that wasn’t enough, there is also the dilemma of whether to invest vs prepay home loan – to benefit from higher returns elsewhere as compared to low post-tax home loan interest rates that are prevalent in India.

But I suggest that before you decide to prepay your home loan, you run your own numbers or get in touch with an investment advisor to help you out.

And if you are one among those who are still deciding whether to take a home loan or not, then I suggest that even before you begin your search for home loans online, some time should be spent to understand how home loans actually work and how best you can manage home loans once you take them.

The idea of doing this post was to highlight that at times, people get over excited when it comes to tax benefits from their home loans.

It is quite possible that you may not even get as much tax benefit as you thought you would be getting from your home loan.

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Written by Dev Ashish

Founder - Stable Investor Investing | Personal Finance | Financial Planning | Common Sense

6 comments

  1. Dev Ashish,
    You are missing a very important point.
    Loss On House Property (LOHP) or simply the interest paid can be carried forward as a loss for 8 years.
    So when your interest payment exceeds 2,00,000 in a year, the unclaimed amount can reflect in the subsequent ITR as loss for next 8 years and can be claimed when interest amount paid in a later year goes below 2,00,000.
    When we plan for 15 or 20 years into the future, there is a decent enough chance that the govt could raise this exemption limit to say 3,00,000 after 4-5 years. At that time we might be able to claim these losses. I know with inflation that might not be a lot but tax savings is still savings.

    It could also happen that Direct Tax Code might come in and we lose tax benefits for home loans.

  2. Hi Dev,

    An additional angle to consider is that, once you opt for an home loan, you loose out on the option of saving tax through HRA. While someone who has taken a home loan might benefit 2L in tax savings through interest repayment, people who stay on rent get a similar benefit in the form of an HRA. In fact HRA does not have a ceiling like home loan interest. Net net, the decision of buying a home should not be based on tax exemptions. Buying a home is more of a security and emotional decision rather than a financial decision (i.e. in the form of tax savings).

    1. Vikram,
      HRA tax benefits are applicable only when you pay rent, but if you buy a home and live in it you save that rent. If you insist on getting HRA tax benefits, then buy a home in another city and allow it for rent while you pay the rent at the city you live in and claim HRA tax benefits.

  3. One more point to be noted is also that the house can be jointly owned e.g., by husbayand wife. In this case, each one is eligible to clcim 2lakhs as loss on the interest, individyalli. So, if both are earno, then it’s a total of 4 lakhs per annum.

  4. Thank you for listing down the various statutes about home loan repayment, Dev. I have a home loan that will start in February and I wanted to know how much should I plan for tax saving in the following fin year. This really helps as my CA was hardly bothered. Thanks.

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