Tax Benefit On Home Loan

Details about Tax Benefit On Home Loan as per the Income Tax Guidelines for year 2011 With the increasing real estate prices, especially in metro cities, it is next to impossible for an individual to purchase a house on their own. The only option left for him/her is to go for a Home loan or a House Loan. Although its a big long term commitment to take a home loan, but there are certain benefits attached to it in terms of Tax deductions on home loan or commonly known as Home Loan Tax Benefits. Let's see all the possible scenarios which an individual (or joint applicants) can fall into after taking a home loan, and we explain what all tax benefits can be achieved for home loan borrowers, as per the Income Tax rules of the year 2011.

Tax Benefits, Tax Rebates, Tax Deductions available On Home Loan

Let's begin with the basics first: We all know that once you take a home loan, you need to repay that through EMI. The EMI you repay each month to the bank is made up of two components - (1) Your INTEREST accrued on the Loan amount and (2) the part which goes to PRINCIPLE Loan Amount. In the remainder of this article, we will refer them as Interest and Principle components.
Good news is that as per the Income Tax rules for the financial year 2011-2012, both the above mentioned components of home loan qualify for tax rebate. Here are the details:

On the Interest Component Payment - Tax rebate is possible under section 24(b) upto a maximum of Rs. 1.5 Lakhs.
On the Principle Component Payment - Tax rebate is possible under section 80C, but there is a OVERALL limit on section 80C of 1 Lakh.

But, please note that there are 2 important conditions to be met for claiming the tax benefits on Home Loan:

1. The applicant must have taken the Home loan after April 1st, 1999.
2. The possession of the property must be within 3 years from the year in which loan was taken by the borrower.

Hence, in total, in a given financial year (say April 2011 to March 2012), you can claim a MAXIMUM tax rebate of Rs. 2.5 Lakhs for your Home Loan Repayment. However, note the use of the word MAXIMUM - one hardly gets a chance to claim the entire 2.5 lakhs tax benefit. How? Let's see.

Please note that these are "DEDUCTIONS". Hence, whatever qualifying amount you are eligble for (say 2.5 Lakhs), that gets deducted from your income completely. To understand this, let's say there is a salaried person who has an annual income from salary as 7 lakhs. Now, if he manages to get the full 2.5 lakh tax deduction for his home loan, then his net taxable income comes down to only (7-2.5) = 4.5 Lakhs only.
So how does he benefit?
Earlier, his taxable income wa 7 lakhs which took him to 20% tax bracket as per the Income tax slabs 2011-2012 for General tax payers.
After taking the home loan and being eligible for maximum home loan tax rebate of 2.5 Lakhs, his taxable income has come down to just 4.5 Lakhs. Hence, he is now in 10% tax bracket.
That's a big benefit - coming down from 20% tax bracket to 10% tax bracket.

Related: All Home Loan Articles
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The tax benefit you can claim depends upon what you are repaying as interest and what you are repaying as principle of your home loan component.
As mentioned above, On the Interest Component Payment - Tax rebate is possible under section 24(b) upto a maximum of Rs. 1.5 Lakhs. Generally, there is no problem in claiming tax benefit for this interest component. Why? Because there are no other things clubbed with section 24(b). Now a days, with EMI's running in the range of 30K per month, on an annual basis it is possible that you end up paying more than 1.5 lakh rupees as interest component. Hence, it is possible to claim full 1.5 Lakh as interest component tax benefit.
Continue further to details of Tax Benfits available on Principle repayment of home loan in the article: Home Loan Tax Benefit