As per Indian income tax laws, any interest paid on a loan taken for a residential property can provide tax savings.
People take housing loans for different reasons such as purchasing, building, rebuilding or repairing of a residential property. According to section 24 of the Income Tax Act, interest paid on such loans can be deducted from taxable income, leading to a lower tax liability. The maximum interest amount that can be deducted from your income depends on whether the property is self-occupied or is let out.
If the property is self-occupied, or in other words you are staying in the property, you can deduct up to ₹200,000 from your taxable income every year.
Example 1: Let's say your annual income is ₹10,00,000. You have taken a housing loan for a self-occupied property, and you pay an interest of ₹300,000 on this loan. In such a scenario, you can deduct up to ₹2,00,000 from your taxable income, and thus, you will have to pay tax only on ₹8,00,000.
Note, the tax rules are different for an under-construction property. If your property is not completed within 3 years of taking a housing loan, from the fourth year you can get the benefit of only ₹30,000 per year.
Example 2: Continuing with the above example, let's say the loan is for an under-construction property, and your property is not ready even after three years. For the first three years, you can deduct up to ₹2,00,000 from your taxable income. However, from the fourth year, you can deduct only ₹30,000 from your taxable income.
If you have taken a loan on a residential property and you have put the property on rent, you can deduct the entire interest amount from your taxable income.
Example 3: Let's say your annual income is ₹15,000,000. You have taken a second home and put this house on rent. You have an interest liability of ₹300,000 on this loan. In such an event, you can deduct the entire ₹300,000 from your taxable income. As you can see, this is different from the interest on housing loan for a self-occupied property.
Use our calculator to check your income tax liability if you are paying interest on residential house. Our calculator offers the option to choose either a self-occupied property or a let-out property. Tax calculations are made according to your selection.