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What is a home loan?
A home loan or the mortgage is nothing but the funding for a new home by any bank or a financial institution. The banks disburse the loan to the home owner/loan seeker with few criteria.
Basically a home loan is divided into two parts; The principle payment and the interest.
All the banks disburse full amount of the loan through cheques in the name of the builder or the concerned person. However, the amount given by the banks will be paid by the loan seeker every month by ways of EMI (Equated Monthly Installments).
The principal amount which is covered under the Section 80C and has a limit of Rs. 1 lakh will be available if the person is living in a home which is taken on loan. However, the loan seeker cannot use this exemption if the home is under construction or if he/she is not staying in the home. The only exemption which a loan seeker can avail is if he/she is working in a different city and can claim the exemption on the principal amount of the home loan under Section 80C.
The principal repayment towards the home loan reduces the income tax:
As mentioned earlier the income tax has Section 80 under which is mentioned the home loan principal repayment deduction. This states that the loan seeker will invest in any of the avenues prescribed in the section if he/she is eligible for the deduction of a maximum amount of Rs. 100000. This also includes investments like the ELSS, PF, LIC and others along with the principal repayment of the home loan.
Section 24 of Income Tax Act and Its deduction explained:
The Section 24 of Income Tax Act covers the amount of interest payable on such capital wherein the property has been acquired, constructed, repaired or renewed with borrowed capital. The amount of interest which is paid yearly should be calculated separately and should be claimed as the deduction each year. However, the penal interest on housing loan will not be allowed as deduction. Apparently, if the purchase price of the property is paid in installments with the interest, the interest portion of the installment will not be allowed as deduction under the Section 24. In case if there is a fresh loan raised in order to repay the original loan and the new loan has been used only for the purpose of repaying the original loan, then the interest paid on the fresh loans will be allowed as deductions.
Tax benefit on the interest on home loan: Section 24:
There are various ways in which the interest on the home loan is treated and the Section 24 contains the tax aspects of the interest on the home loan repayment. However, the maximum limit under the section as mentioned earlier is Rs. 1, 50,000 and one needn’t stay in the home in order to claim the benefit. The amount of interest which is paid is apparently deducted from the taxable income and hence reduces the tax liability. Also, there is no limit on the number of home one can claim. The only limit will be of Rs. 1, 50,000 on the entire amount.