FY25 closing on March 31: How early home loan EMI payments can offer tax relief; check details

Taxpayers have a little over 20 days left to make smart tax-saving decisions to reduce their tax liability. They can consider investing in various tax-saving instruments like PPF, NSC, SSY, and NPS to avail tax benefits under the Old Tax Regime. These financial products allow taxpayers to claim tax benefits under different sections, such as 80C and 80CCD(1B).

In addition to these options, making payments towards a home loan can also provide tax savings. According to Section 24(b) of the Income Tax Act, individuals can claim a deduction of up to Rs 2 lakh per year on the interest paid on a home loan for a self-occupied property.

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Tax benefits on home loan

Home loan borrowers seeking to optimise tax savings have a strategic opportunity to maximise deductions by making early EMI payments before the financial year ends on March 31. The Income Tax Act, 1961, offers tax benefits on both the principal and interest components of home loan EMIs, presenting a viable method for taxpayers aiming to reduce their taxable income. By understanding the specific sections of the Income Tax Act that apply, homeowners can make informed decisions to enhance their financial standing. 

The principal repayment of a home loan EMI qualifies for a deduction under Section 80C of the Income Tax Act, with a cap of Rs 1.5 lakh per financial year. Simultaneously, the interest component is eligible for deduction under Section 24(b), allowing up to Rs 2 lakh for self-occupied properties. 

Rented properties, on the other hand, do not have an upper limit on interest deductions. By planning additional EMI payments before the close of the financial year, borrowers can ensure they fully utilise these deductions, thereby reducing their taxable income and improving financial efficiency. 

Making early EMI payments before March 31 also aids in reducing the interest burden over the long term. By prepaying a portion of the loan or making an extra EMI payment, borrowers effectively lower the outstanding principal, which in turn decreases future interest obligations. 

This strategy can be particularly beneficial for borrowers yet to reach the Rs 2 lakh interest deduction limit under Section 24(b), as it allows them to maximise their available deduction. Additionally, early payments prevent the risk of missing out on current year deductions, which would otherwise be forfeited if payments are delayed into the next financial year.

Early EMI payments

Home loan borrowers interested in making early EMI payments should begin by reviewing their loan statement to ascertain the principal and interest paid to date. Many banks facilitate additional payments via online banking or UPI, making the process straightforward. 

It is crucial to confirm with the lender that these extra payments are adjusted against the outstanding principal to ensure that future interest payments are reduced. Early payments not only contribute to tax savings but also provide a practical route to reducing the overall debt burden.

While making early EMI payments can indeed yield significant tax benefits and reduce long-term interest obligations, it's prudent for borrowers to consult financial experts to tailor these actions to their individual circumstances. Recording these payments is essential for easy tax filing, ensuring that all deductions are accurately claimed.