Income tax benefits on home loan can be divided in 2 components –

• Principal component in EMI
• Interest component in EMI

The principal and interest component EMI will get different tax benefits.

Tax Benefits on Principal Component of Home Loan

You are eligible to claim tax benefits under Section 80C for the principal repayment of a home loan. You can claim deduction up to 1 Lakh along with all other permissible instruments like, life insurance premium, PPF, ELSS, NSC etc.

You are eligible for this benefit only if the loan is for a self occupied house. But if you are staying in another city for job and have house in another city, then you can claim this benefit even if the house is not self occupied.

Tax Benefits on Interest Component of Home Loan

For those who are planning to buy a home this year, tax exemption on home loan interest payment has been increased by Rs. 1 lakh in the recent budget. This is in addition to the existing exemption of Rs. 1.5 lakhs. In total, this year you can claim a deduction of Rs. 2.5 lakh for interest paid on your home loan. Along with this you can enjoy the exemption of Rs. 1 lakh on payment of principal part of home loan as usual.

But, this exemption is allowed only under the following conditions.

• The increase in exemption limit is only for this year alone.
• This increase in exemption limit does not apply to existing home loan takers. It is only for the loan sanctioned by the financial institutions during 1st April 2013 to 31st March 2014.
• The loan is taken for your first home i.e., you as a taxpayer do not already own a residential property on that date.
• The value of the property does not exceed 40 lakhs.
• The loan amount does not exceed 25 lakh.

The additional deduction on interest payment of home loans can be claimed in assessment year (AY) 2014-15. In case you are not able to exhaust the limit in AY2014-15, the balance can be claimed in AY2015-16.

Thus, buying a home is considered both an investment as well as an act of fulfilling a dream of living in own house. From a financial perspective, home loan is considered a good debt because you get tax exemption on loan payments and at the same time your asset appreciates with time.

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