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Home Loan Interest Deduction under Income from House Property

Owning a house is not only a matter of pride but also a smart financial decision, as the Income Tax Act provides significant tax benefits on home loans. These benefits apply to both self-occupied and let-out/rented properties, allowing taxpayers to save money while repaying their home loans. The deductions are primarily available on interest paid on the home loan, along with certain benefits for pre-construction interest.

Understanding these provisions is essential for maximizing tax savings and planning finances effectively. Let us go step by step.

Income from House Property – Overview

Under the Income Tax Act, 1961, income from house property is taxed under a separate head: “Income from House Property.”
It covers:

  1. Self-Occupied Property (SOP): A property used by the owner for self-residence (maximum two houses can be treated as self-occupied).
  2. Let-Out Property: A property rented out to earn rental income.
  3. Deemed to be Let-Out: If an individual owns more than two houses, additional houses are considered “deemed let-out.”

Deduction on Home Loan Interest – Section 24(b)

  1. a) Self-Occupied Property (SOP)
  • Maximum deduction allowed: ₹2,00,000 per year (for interest paid on home loan).
  • Condition: Loan should be taken for purchase or construction, and construction must be completed within 5 years from the end of the financial year in which the loan was taken.
  • If not completed within 5 years → Deduction reduces to ₹30,000 only.
  • Deduction available for both first house and second house (self-occupied).
  1. b) Let-Out Property
  • Entire interest paid on the home loan is allowed as deduction (no upper limit).
  • However, as per amendment from AY 2018-19 onwards:
    • Loss under “House Property” that can be set off against other income is restricted to ₹2,00,000 per year.
    • Balance loss can be carried forward for 8 years and set off only against “Income from House Property.”
  1. c) Deemed to be Let-Out
  • Deduction treatment is the same as let-out property (i.e., full interest allowed, subject to ₹2,00,000 set-off rule).

 

Pre-Construction Interest (Pre-EMI Interest)

Often, taxpayers take a loan for property that is under construction. During this time, they pay pre-construction interest (interest paid before the completion of construction).

  • Deduction for such pre-construction interest is allowed in 5 equal annual installments, starting from the year in which construction is completed.
  • Maximum limit: Clubbed with the regular interest deduction under Section 24(b).
  • Example:
    • Pre-construction interest = ₹3,00,000
    • Installment = ₹60,000 per year (allowed for 5 years)
    • For SOP → Deduction restricted to ₹2,00,000 total (including current year + pre-construction installment).
    • For Let-Out → Full deduction allowed (subject to ₹2,00,000 set-off limit).

Conditions for Claiming Deduction

  1. Loan must be taken for purchase, construction, repair, renewal, or reconstruction of house property.
  2. Deduction not available on brokerage, commission, or registration charges.
  3. Deduction available only to the owner/co-owner of the property who has taken the loan.
  4. In case of joint loans, each co-owner can claim deduction separately (up to their share in property and repayment).

Practical Examples

Example 1: Self-Occupied House

  • Home Loan Interest: ₹2,80,000
  • Deduction allowed: ₹2,00,000 only (restricted).

Example 2: Rented House

  • Home Loan Interest: ₹4,50,000
  • Rental Income: ₹3,60,000
  • Net Loss from House Property = ₹(90,000)
  • This loss can be set off against other income (salary, business, etc.) up to ₹2,00,000. Balance, if any, is carried forward.

Example 3: Pre-Construction Interest

  • Loan taken in FY 2021–22, construction completed in FY 2024–25.
  • Total Pre-construction interest (till March 2025): ₹4,00,000
  • Deduction allowed: ₹80,000 every year from FY 2024–25 to FY 2028–29 (5 years).

Additional Benefits on Home Loan (Beyond Section 24(b))

Apart from interest deduction, there are other tax benefits:

  • Section 80C: Deduction up to ₹1,50,000 for principal repayment.
  • Section 80EE & 80EEA: Additional deduction (subject to conditions) for first-time homebuyers.
    • 80EE: Up to ₹50,000
    • 80EEA: Up to ₹1,50,000

 

Conclusion

The Income Tax Act provides generous tax benefits on home loan interest, making real estate a tax-efficient investment. While self-occupied properties enjoy a cap of ₹2,00,000 on interest deduction, let-out properties allow full deduction (subject to set-off rules). Importantly, pre-construction interest can also be claimed in installments.

By carefully understanding these provisions and planning home loans accordingly, taxpayers can maximize tax savings while creating long-term wealth through property ownership.

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