Explained: How You Can Save Up To Rs 5 Lakh In Taxes Every Year When Buying A New Home

Buying a home is one of the biggest financial decisions in life. Besides owning a place to call your own, you can also enjoy several tax benefits that help reduce your overall tax burden.

Understanding these tax-saving opportunities can make your home purchase even more rewarding.

When you buy a home and take a home loan, you can save a good amount of tax every year. You can get a deduction of up to Rs 2 lakh on the interest you pay on the loan under Section 24.

Additionally, the money you pay toward the loan principal, along with stamp duty and registration fees, can help you save up to Rs 1.5 lakh under Section 80C.

If you are a first-time homebuyer, you may also get extra deductions on the interest paid, up to Rs 50,000 or even Rs 1.5 lakh under special sections like 80EE or 80EEA.

So, altogether, you could save tax on up to Rs 5 lakh of your income every year. However, the exact amount of tax saved depends on your income tax slab, but this can mean a big reduction in your overall tax bill.

Here's the calculations:  

Dedication on Home Loan Interest (Section 24(b))

One of the biggest tax benefits for homeowners is the deduction on the interest paid on a home loan. Under Section 24(b) of the Income Tax Act, you can claim a deduction of up to Rs 2 lakh per year on interest paid for a self-occupied property.

If the property is rented out, there is no upper limit on the interest deduction, but the overall loss that can be set off against other income is capped at Rs 2 lakh.

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Principal Repayment Deduction (Section 80C)

The principal portion of your home loan repayment qualifies for deduction under Section 80C, along with other investments like PF, PPF, and ELSS. The maximum limit for Section 80C is Rs 1.5 lakh per year. This helps reduce your taxable income and saves on taxes.

Additional Deduction for First-Time Homebuyers (Section 80EE & 80EEA)

If you are a first-time homebuyer, you may be eligible for extra tax benefits:

Section 80EE: Offers an additional deduction of Rs 50,000 per year on interest paid, subject to certain conditions like loan amount and property value.

Section 80EEA: Provides an extra deduction of Rs 1.5 lakh per year on interest for affordable housing loans sanctioned between specific dates.

Dedication to Stamp Duty and Registration Charges

Under Section 80C, you can also claim a deduction on the stamp duty and registration fees paid while purchasing the property, as long as these expenses are within the overall Rs 1.5 lakh limit.

Tax Benefits on Home Sale (Capital Gains)

If you sell your property after holding it for more than two years, the gains are considered long-term capital gains (LTCG) and taxed at 20% with indexation benefits.

You can save tax on LTCG by reinvesting the sale proceeds in another residential property or specified bonds under Section 54 and Section 54EC.

Mr. Deepak Kumar Jain, Founder and CEO of TaxManager, said, “Tax Benefits u/s 24(b), 80C, 80EE and 80EEA can be claimed if you have chosen the Old Regime for Tax Calculations. Old Regime is useful if you have an annual income over Rs 10 Lakhs and more than Rs 3.5 to 4 Lakhs in Deductions to claim, which reduces your tax liability much more than you can claim in the New Regime."

Important Points to Remember

To claim tax benefits, the property must be registered in your name.

You also need to get possession of the house within 5 years from the end of the financial year in which you took the loan.

Make sure to keep all important documents like loan statements, sale deeds, and payment receipts safe.

To claim these deductions, the home loan must be taken from a recognised financial institution.

Section 80EE (Extra Deduction for First-Time Buyers)

If you are buying your first home, you can claim an extra deduction of Rs 50,000 on the interest paid on your home loan under Section 80EE. But there are some conditions. Your home loan should not be more than Rs 35 lakh. Also, the value of your house should not exceed Rs 50 lakh. Lastly, this benefit applies only if you took the loan between April 1, 2016, and March 31, 2017.

Section 80EEA (Additional Deduction for First-Time Buyers)

There is another benefit called Section 80EEA, which gives extra tax deduction on home loan interest for first-time buyers. To qualify, the stamp duty value of your house must not be more than Rs 45 lakh. Also, you should have taken the loan between April 1, 2019, and March 31, 2021. This helps more buyers save on taxes.

Section 80C (Principal Repayment & Other Investments)

Under Section 80C, you can claim a deduction up to Rs 1.5 lakh every year. This includes your home loan principal repayment as well as other investments like PF, PPF, or ELSS. If you invest in other options too, the actual amount you can save on your home loan principal repayment may be less.

Tax Savings Depend on Your Tax Slab

How much tax you save depends on your tax bracket. For example, if you are in the 30% tax bracket, a deduction of Rs 5 lakh can reduce your tax by up to Rs 1.5 lakh. So, the higher your income, the more you can save with these deductions.

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