As per the provisions of the Income Tax Act, 1961, you can claim tax benefits on both the principal (under Section 80C) and interest components [under Section 24(b)] of the home loan. These deductions are available to assessees who have taken a loan to either buy or build a house.
Tax benefits on loan amount
You can claim deduction for the principal of the home loan (for purchase or construction of a house) together with the amount paid for stamp duty, registration fee and other expenses for the purpose of transfer of the purchased property, starting from the financial year in which the property is bought or the construction is completed. Maximum deduction allowable in a financial year is Rs 1 lakh.
In order to claim the deduction, you cannot sell the property for five years from the end of the financial year in which you took possession of it. In case the property is sold before this stipulated period, the deduction that was allowed under Section 80C will be discontinued. Further, the amount already allowed as deduction will be considered under the head of your income for the financial year in which the property was sold
Tax benefits on interest you pay
You can claim a deduction for the interest paid on a housing loan and even on loans taken for repair, renewal or reconstruction of an existing property. Such deduction is available on accrual basis.
In case of a self-occupied property (financed by a housing loan taken after 1 April 1999 to buy or build), you can claim interest deduction of up to Rs 1.5 lakh a year. It is essential that the acquisition or construction of the property is completed within a period of three years from the end of the financial year in which the loan is taken.
It is important to note that the interest deduction can be claimed only from the financial year in which the property is acquired, constructed or reconstructed. For the pre-acquisition or pre-construction period, the interest deduction can be claimed equally over five financial years, starting from the financial year in which the property is acquired, constructed or reconstructed.
Popular perception is that there is an overall restriction of Rs 1.5 lakh for tax benefit on the home loan interest. This is not true. This restriction is applicable only for self-occupied house property. The interest payable on a home loan is not directly deductible from your salary income (or business income) for tax purposes.