If you have taken a loan either for the purpose of buying a house or a car or any other purpose, you are required to pay equated monthly installments (EMIs) that comprise of principal and interest. You might be surprised to know that sometimes your EMIs are eligible for tax deduction and home loans EMIs fall under this category. The EMIs on home loans are tax deductible under the Income Tax Act, 1961.
However there are certain conditions in relation to the home loan that make the EMIs eligible for tax deduction.
Split the EMI
One of the most important aspects to be noticed by the tax payer is that the EMI should be broken into two parts - principal and interest. It should be practiced because both interest and principal amount are permitted for tax deduction under different sections of the Income Tax Act. Interest paid on a housing loan is allowed for deduction under Section 24 of the Income Tax Act and the installments paid are entitled for deduction under Section 80 C. The tax benefits for annual interest and home loan principal repayments are Rs 1.5 lakh and Rs1 lakh respectively. Hence it would be better if the tax payer know the amount that come under interest and principal separately.