The Core Components: Principal and Interest
A home loan EMI has two parts: principal repayment and interest payment. The Income Tax Act offers deductions on both, but under different sections and with different limits. The primary benefit for interest falls under Section 24(b), while principal repayment is
covered by Section 80C. These benefits are predominantly available to taxpayers who opt for the Old Tax Regime. Under the New Tax Regime, these deductions are generally not available for a self-occupied property.
Interest Deduction for Self-Occupied Property
If you live in the property you've taken a loan for, it's classified as self-occupied. Under Section 24(b), you can claim a deduction of up to ₹2 lakh per financial year on the interest you've paid. This limit applies provided the construction of the property is completed within five years from the end of the financial year in which the loan was taken. If this timeline isn't met, the deduction limit for interest drops to just ₹30,000.
Interest Rules for Let-Out Property
If you have rented out your property, the rules are more generous regarding the interest amount. There is no upper ceiling on the amount of home loan interest you can claim as a deduction against your rental income. This benefit is available under both the old and new tax regimes. However, there's a cap on how much loss from house property (where interest paid exceeds rental income) can be set off against other income sources like salary in a given year. This is capped at ₹2 lakh.
The Deduction for Repairs: What's the Rule?
The rules for repair-related deductions differ significantly. For a let-out property, you get a flat standard deduction of 30% of the Net Annual Value (rental income minus property tax) under Section 24(a). This is meant to cover all expenses, including repairs, so you cannot claim any additional amount for actual repair costs. For a self-occupied property, there is no such standard deduction. However, if you take a specific loan for home repairs or renovation, the interest paid on that loan is deductible up to ₹30,000 per year. This ₹30,000 limit is included within the overall ₹2 lakh interest deduction cap of Section 24(b), not in addition to it.
Claiming Pre-Construction Interest
Many homebuyers pay interest on their loan while the property is still under construction. You cannot claim this interest during the construction period. This accumulated interest, known as pre-construction interest, can be claimed as a deduction in five equal annual instalments. The eligibility to claim these instalments begins from the financial year in which the construction is completed and you get possession of the property. Each instalment is claimed as part of the overall Section 24(b) interest deduction limit.
Principal Repayment under Section 80C
The principal portion of your EMI is also eligible for a tax break. You can claim a deduction for the principal amount repaid in a financial year under Section 80C of the Income Tax Act. The maximum deduction under this section is capped at ₹1.5 lakh. This is a consolidated limit that includes other eligible investments and expenses like Public Provident Fund (PPF), life insurance premiums, and Equity Linked Savings Schemes (ELSS). To claim this deduction, you must not sell the property within five years of possession.
