Home loan tax deductions: Self-occupied vs rented, the differences

• For self occupied property, interest deduction is restricted to ₹2 lakhs per annum
  
• For a rented property, the entire interest amount is a deductible expense.
  
• You can begin claiming your home loan benefits only once you have received possession.
  

Buying a home is undoubtedly one of the biggest financial commitments in one’s life. And since it is a big ticket purchase, one more often than not needs to take a loan to purchase.

Tax deductions on home loans provide an incentive to people to purchase their own home. We take a look at how home loan tax deductions work in different situations and other rules.

Home loan tax deduction for self-occupied and rented properties

The Income Tax Act provides for deduction of interest on home loan as well as for repayment of principal loan borrowed for acquiring house property. “For self occupied property, interest deduction is restricted to ₹2 lakhs per annum whereas for a rented property, the entire interest amount is a deductible expense,” says Shabala Shinde, Partner, Grant Thornton Bharat.

Section 80EEA gives additional exemption of ₹1,50,000 on the payment of interest on home loan. This deduction is available if the loan is taken under the affordable housing scheme. “Interest paid on loans taken before April 1 2022 are eligible to be claimed under Section 80EEA,” says Suneel Dasari, founder and CEO, Eztax.in, a tax filing portal.

For repayment of principal amount, the deduction is available against total income and is restricted to ₹1.5 lakhs annually irrespective of the property being let out or self-occupied, under section 80C.

However, since section 80C also includes investments like public provident fund (PPF), equity linked savings scheme (ELSS), provident fund contributions and payments like life insurance premiums, you may not be able to utilise the full deduction of ₹1.5 for home loan principal payment.

You can also claim a tax deduction on registration and stamp duty paid on the property under section 80C.

Tax rules to remember

Condition to fulfil for claiming maximum tax deduction on interest paid

Here are a few tax rules one should keep in mind regarding tax deduction on home loans.

To qualify for the maximum allowable deduction on loan interest, you must complete the purchase or construction of the house within three years of obtaining the loan. If the acquisition or construction takes longer than three years, your deduction is limited to ₹30,000 instead of the full ₹2 lakhs.

Home loan tax benefits can be availed only after possession

One can begin claiming your home loan benefits only once the construction of the home is complete, and possession has been handed over by the builder. However, what about the instalments you paid during the construction phase or before you received the keys to your house?

According to the rules, you cannot claim a deduction for principal repayment during this period. Still, the interest paid can be accumulated and claimed after you take possession of the property.


The law allows for a deferred deduction on the interest paid during the pre-construction period. This deduction on such interest can be availed equally over a span of 5 years, starting from the year in which you take possession of the property.

Deduction of interest available on accrual basis

You can claim interest deduction on your home loan even if you have missed some EMIs, subject to certain conditions. The Income Tax Act allows for the accrual of interest benefits, meaning that you can accumulate the interest paid during the financial year, including any missed EMIs, and claim it as a deduction in your income tax return.

However, it's crucial to ensure that you have proper documentation to prove the interest payments made. However, the deduction of property taxes and interest paid on a home loan are available only on a ‘paid’ basis.

Home loan deduction applicable only under old tax regime

Home loan tax deduction is available only if you opt for the old tax regime. “Note that in case you opt for the new tax regime for FY 2023- FY2024, you will not be eligible for the deduction under section 24 on interest on home loan as well as 80C deduction for repayment of the principal amount of loan,” says says Adhil Shetty, CEO, BankBazaar.com.

Also, in that case, you cannot set off the house property loss against any other head of income.