Investing in a house is considered as one of the best tax-planning tools due to various tax-benefits and concessions provided under the Income Tax Act, 1961. Interest paid gets partially offset by IT benefits which results in reducing the net cost of borrowing.
The tax benefits on home loans availed for the purpose of purchase or construction of a house property are provided under two separate provisions of the IT Act.
When we borrow a housing loan, we are required to repay the loan in monthly installments spread over the tenure of the loan. The monthly loan installments are called EMIs (Equated Monthly Installments) because each installment is of the same amount. EMI consists of two parts – Principal and Interest. While Section 80C provides tax deduction for the repayment of the principal sum, section 24(b) provides tax benefit on the interest portion of the loan.
However, tax benefits under section 80c and section 24(b) of the IT Act differ in many respects. This post makes a comparison of tax implications of home loans u/s 80c with section 24(b):
Home Loans: Principal deduction u/s 80C vs. Interest deduction u/s 24(b)
1. Maximum ceiling on tax benefit
Maximum tax deduction for repayment principal component of home loan can’t exceed Rs one lakh under section 80c.
Housing loan interest deduction, on the other hand, is allowed up to a maximum amount of Rs 1.5 lakh under section 24(b). However, the acquisition or construction of the house property should be completed within 3 years from the end of financial year in which home loan was taken; otherwise, the amount of interest benefit allowed is only up to Rs 30,000.
Furthermore, the above tax deduction limit u/s 24(b) is applicable only for self-occupied house property. In case of let-out or deemed to be let out house property, interest is deductible fully without any limit.
2. Starting date for claiming tax benefit
Contrary to popular perception, deduction on principal component of home loan under section 80c is allowed as soon as you start repaying the home loan. For a second opinion or further details, please read, “Is Completion Necessary for Claiming Tax Benefit under Section 80c”.
Interest deduction on housing loans under section 24(b), on the other hand, is allowed only on acquisition or completion of the house property.
However, interest deduction for pre-acquisition or pre-construction period is also allowed but only after acquisition or construction is complete. It is allowed in 5 equal annual installments. But even after including the above, the total deduction should not exceed Rs. 1.5 lakh per annum. For further details, please read, “8 Tax Considerations to Know before Buying a House”.
3. Source of home loan
Unlike section 24(b), Section 80C doesn’t allow any tax deduction for home loans taken from friends and relatives. For claiming tax benefit on principal component of the home loan under section 80C, you’re required to borrow only from the lenders specified in that section.
There is no such restriction under section 24(b) of the IT Act for claiming tax benefit on interest component of the housing loan.
4. Purpose of housing loan - Home purchase / construction vs. Home improvement
Deduction under section 80C for principal portion of the housing loan EMI is not allowed if the home loan borrowing is for the purpose of reconstruction, renewal or repair of house property. Put simply, tax benefit under section 80C is only allowed for buying or constructing a new home and not for improvement, extension, renovation or alteration of an existing house.
In contrast, deduction for Interest is allowed under section 24(b) even for the loan taken for the purpose of repair, renewal or reconstruction of existing house property but subject to the limit of Rs 30,000 in case of self-occupied house property. In case of let out house property, actual interest is allowed without any ceiling.
5. Purpose of House Property - Self occupied vs. Let out
As already stated, section 24(b) makes a distinction between self occupied and let out (or deemed to be let-out) house property for determining the maximum amount of interest eligible for tax benefit.
In contrast, the tax benefit under section 80c remains same irrespective of whether the house property is self-occupied or let out. The only condition is that principal repayment is for home loan taken for a residential house property (i.e., commercial property is not eligible for the tax deduction u/s 80C).
6. Payment basis - Due vs. Cash basis
Tax benefit u/s 80C can be claimed only when the actual payment is made. Interest deduction u/s 24(b), on the other hand, is allowed on accrual or due basis. Put simply, unlike principal portion, interest deduction can be claimed even if not paid.
7. Restriction on sale of house property
The tax benefit under section 80c is allowed subject to the condition that house property should not be sold before a period of 5 years. If you sell the house before the expiry of five years from the end of the financial year in which you obtained the possession, the deduction will be discontinued and the entire tax deduction claimed in earlier years under section 80c – for repayment of principal component of the home loan – will be deemed to be your income (in addition to capital gains) in the year in which you sell the property.
However, the housing loan interest deduction claimed under section 24(b) won’t be reversed.
8. Home loan pre-payment: Original loan vs. Subsequent loan
Tax benefits on interest component of the home loans u/s 24(b) is allowed not only for original home loan but also for second /subsequent / new home loan taken to refinance the first loan. In other words, if the new housing loan is taken to pay off an existing housing loan, tax benefit under section 24(b) is allowed.
However, unlike section 24(b), there is no specific mention under section 80c for prepayment of existing home loan by taking a fresh home loan.
So what it means is that when you repay the balance outstanding principal component of your first / original / existing home loan by taking a second home loan, you’ll be entitled for tax deduction under section 80c but within the overall limit of Rs one lakh. Further, when you subsequently start repaying your second housing loan, you’ll be entitled for tax benefit only on the interest portion u/s 24(b) and not on the repayment of principal component u/s 80C. This is quite obvious because otherwise it will amount to double tax deduction on the principal component of the home loan.
1. Section 80c – Conditions & Restrictions
2. 4 Ways to Claim HRA with House Loans Tax Benefits
3. Claiming HRA Tax Exemption - Tips & FAQs
4. Buying a House: 8 Tax Considerations to Know
5. Taxation of Notional Rental Income
6. Home Loan Interest Rates: Fixed vs Floating
7. HRA Tax Calculator
8. Income Tax Calculator