Individuals servicing a home loan might find that their credit facility also serves as one of the best and easily accessible tax-saving tools. Apart from this major benefit, your home loan also assists in asset creation at lower interest rates. Easy repayment options, competitive interest rates, flexible tenors and tax-saving prospects make housing loans an endearing funding option. 

However, very few individuals are aware of the optimum loan amount and tenor, which can proffer the best ways to manage a loan with low credit costs and fast repayment plans. In short, your housing loan can deliver maximum savings only when used wisely. 

Here is a look at some smart tips that will help you optimize your tax saving on home loan.

Consider the Section 80 C Tax Rebates 

You can save income tax on the home loan principal repayment amount up to Rs. 1.5 lakh each year under Section 80 C of the Income Tax Act, 1961. Remember, this provision also has other equally effective tax-saving alternatives such as deductions available on EPF and PPF contributions, investments in ELSS, ULIPs, tax benefits on payment of school fees, life insurance premiums and many more. In such a scenario, you may not have adequate room to claim the deductions on your home loan principal amount.

Watch Your Annual Home Loan Interest Outgo

As opposed to this, the tax savings offered on home loan interest payments under Section 24 (b) are standalone benefits meant for the sole advantage of borrowers when they pay housing loan interest. Thus, the annual interest outgo becomes a major determinant as to how much tax you may save through a house loan. If you fall in the 30% income tax bracket, you may save just Rs. 60,000 each year for an annual interest outgo of Rs. 2 lakh or higher. When you hold a lower interest outgo, your tax saving would be less as well. 

The deduction you can claim on the interest paid is limited to Rs. 2 lakh under Section 24 per year. This applies to self-occupied and vacant properties. In case of a let-out property, there is no limit on the maximum interest that one may secure. Furthermore, the losses adjusted against other income heads cannot exceed Rs. 2 lakh either. Any remaining loss under ‘Income from house property’ may be carried forward for 8 successive years.

Select the Right Home Loan Amount and Tenor

If you simply consider the tax savings potential, you may wonder if opting for a higher loan amount and a long tenor might be a wiser move. But this will also mean a rise in the interest outgo, which may cancel out the high tax savings. In that case, the best way to strike a balance is to compare the net interest rate after evaluating the tax-saving benefits. Net interest rate is the effective rate of your housing loan that allows you to pay the same amount of interest after deducting tax savings from the original interest levied by the lender. 

Higher Loan Amounts Mean Bigger Interest Outgo

The interest portion of your loan EMI is much greater in the initial years of loan repayment. It gradually decreases as the loan progresses with a corresponding rise in the principal amount. Since the maximum tax relief on the loan interest sum is Rs. 2 lakh under Section 24 (b), any interest you pay that exceeds this annual limit does not help in saving taxes. 

High loan amounts coupled with lengthy tenors translate into larger interest outgo and zero tax savings along with an extended period of debt. To maintain the right mix of lower interest outgo and higher income tax saving, you could consider making partial pre-payments on your loan. This will lower the outstanding sum and bring the annual interest close to Rs. 2 lakh allowing you to utilise the entire deduction limit. 

Aim for Shorter Repayment Tenors 

Keeping the tenor short enables you to check the interest component and also pay off the loan earlier. Once your annual interest outgo drops significantly below Rs. 2 lakh, you may be able to accommodate other tax-saving measures such as securing loans to buy another house or a home upgrade. It will ensure debt retention at lower levels and optimum tax savings for a longer duration. 

Enhance Tax Savings with a Joint Home Loan

In the event that both spouses pay a hefty income tax, they could take up a high-value home loan and claim the principal and interest deductions on it separately. This way, they can obtain a total deduction of Rs. 3 lakh under Section 80 C (Rs. 1.5 lakh + Rs. 1.5 lakh claimed by each borrower) on the principal repayment and Rs. 4 lakh (Rs. 2 lakh each) under Section 24 (b). It must be noted that both applicants should be co-owners of the house to avail the rebates.

Home Loan Tax Benefits for Buying a Low-Cost House

If you buy a property under the affordable housing category, an additional deduction of Rs. 1.5 lakh is permitted under Section 80 EEA on the interest variable. This is on top of the tax relief already available under Section 24 (b) of Rs. 2 lakh. Your total concession, in this instance, would be Rs. 3.5 lakh per year (Rs. 2 lakh u/s 24 (b) + Rs. 1.5 lakh u/s 80 C). While securing these exemptions, try to exhaust the Section 24 benefits first and then claim the Section 80 EEA rebates.

What Is the Maximum Deduction You Can Claim on a Home Loan?

All the house loan deductions, when clubbed together, can fetch you a maximum tax relief of Rs. 5 lakh, subject to meeting the specified conditions. It includes: 

Summing Up

As seen from the table above, when you avail of a home loan, you are assured of substantial tax savings and a lower debt burden. Moreover, a competitive home loan interest will make your loan cheaper and reduce the taxable income. 

Borrowers must understand the tax exemptions they are eligible for, in order to claim them at the time of filing their income tax returns every fiscal year. You may also find it much simpler to use an income tax calculator prior to beginning the taxation process. It will enable you to compute the applicable deductions on your taxable income and receive a clear estimate of the payable taxes.