What Should Home Buyers Know About Section 80EEA?

Most people aspire to own a house, a residential apartment, or a flat. However, with the increasing real estate costs, many homebuyers require some form of loan or home financing. Typically, a downpayment of around 20% of the property value is required, while a home loan covers the remaining cost. To be eligible for a home loan from a reputable bank or non-banking financial company, the applicant must provide proof of income and have a good credit score. A home loan is a significant financial commitment that requires careful financial planning and discipline. Fortunately, the Income Tax Act provides several deductions and reliefs on home loan repayment to encourage home ownership in the country.

Home loan repayment 

When a home buyer takes a home loan from a bank or NBFC, the repayment schedule is broken down into EMI or equated monthly instalments. Most banks have an EMI calculator on their website, giving the applicant an approximate value of these monthly repayment instalments for planning purposes.

EMIs depend on several factors, including -

• Loan amount
• Tenor or duration of the loan
• Interest rates (fixed or floating)

Now, the EMI typically has two components - repayment of the principal amount and repayment of the interest component. Depending on the terms negotiated at the time of taking the loan, the interest may vary or even decrease as the principal amount repaid increases.

Income tax deductions on repayment of home loans

Repayment of principal amount

According to Section 80 of the Income Tax Act, a taxpayer may claim deductions on the principal repayment component to the extent of INR 1.5 lakhs per year. This is a section that allows homeowners to reduce their taxable income. It can be claimed by individuals and HUF (Hindu Undivided Family) units but not by sole proprietorship or partnership companies and LLPs. According to the terms of this provision, the taxpayer can deduct INR 1.5 lakh or the principal amount repaid during the financial year (whichever is lower). However, the property must not be resold within five years to claim this deduction. If it is resold, the deduction claimed will be added to the taxes in the year of sale.

Repayment of interest amount

Under section 24B of the Income Tax Act, the homeowner can claim an income tax deduction of up to INR 2 lakhs per year from the annual income on the interest payment of the home loan. This exemption is, however, only applicable if the construction of the property is completed within five years from the time the loan is taken. In the case of self-occupied property, this loan must be taken only for buying or constructing the property and not for renovation, repairs, etc. In the case of rented property, the loan can be for the purpose of acquisition, construction, renovation, or repairs.

What is Section 80EEA?

In addition to these existing deductions, the central government provided additional incentives to homebuyers opting for affordable housing between 2019 and 2022. This is covered under Section 80EEA of the Income Tax Act. Here are the important provisions that homeowners should know about –

• Under Section 80EEA, a maximum deduction of INR 1.5 lakh per year is available to homeowners.
• The deduction can be claimed if the home loan has been sanctioned by the bank or registered NBFC between 1 April 2019 and 31 March 2022.
• This is available only to first-time homebuyers who do not own any residential property at the time the loan is sanctioned.
• The deduction can only be claimed when the loan has been taken to purchase a home under the affordable housing provisions. The total stamp value of the property should not exceed INR 45 lakhs.
• If the property is jointly owned and co-owners are also co-applicants of the home loan, each can claim an income tax deduction of up to INR 1.5 lakh on his or her income under this provision.
• The deduction under Section 80EEA is available to homeowners in addition to the exemption specified under Section 24B.
• Deduction under Section 80EEA is only available to the individual taxpayer and cannot be claimed by HUF, partnership firms or any other entities.

It is important to note that Section 80EEA is different from Section 80EE. The latter only applies to home loans for affordable housing sanctioned between FY 2016 and 2017.

Staying updated about the various deductions and exemptions provided each year in the annual budget can help homeowners make the best of these provisions and plan the financial outflow efficiently. If you are a prospective home buyer, it may be a good idea to seek the help of a financial advisor to understand the income tax exemptions available to you.