Availing a Home Loan and Investing in Fixed Deposits Can Help You Save Tax: Here’s How

When it comes to saving taxes in India, many taxpayers often overlook how strategic use of financial products can double as effective tax-saving tools. Imagine reducing your tax outgo while simultaneously building wealth—sounds like a win-win, doesn’t it? Two such powerful allies in your tax-saving journey are home loans and Tax-Saver Fixed Deposits (FDs). If you’re looking to optimize your financial planning and minimize taxes, this guide will walk you through the critical ways to leverage these tools effectively.

Saving Tax with a Home Loan

1. Principal Repayment Under Section 80C

The principal portion of your home loan EMI qualifies for a tax deduction of up to ₹1.5 lakh under Section 80C of the Income Tax Act. This is part of the overall limit for Section 80C, which includes other investments like ELSS, PPF, and NSC, Tax Saver FD, etc.

Pro Tip: Ensure that your property is not sold within five years of possession; otherwise, the deductions claimed will be reversed.

2. Interest Payment Under Section 24(b)

The interest paid on your home loan is eligible for deduction under Section 24(b). For self-occupied properties, the maximum deduction is ₹2 lakh per financial year. If the property is rented out, there is no upper limit on the interest deduction; however, the total loss under the "Income from House Property" head is capped at ₹2 lakh.

3. Additional Benefits for First-Time Homebuyers

For affordable housing loans sanctioned between April 1, 2019, and March 31, 2024, Section 80EEA offers an extra deduction of ₹1.5 lakh for properties valued up to ₹45 lakh.

4. Stamp Duty and Registration Charges

Under Section 80C, the stamp duty and registration charges paid for your home can also be claimed as deductions, subject to the overall limit of ₹1.5 lakh.

Saving Tax with Fixed Deposits

1. Tax-Saving Fixed Deposits Under Section 80C

Investments in 5-year Tax-Saving FDs are eligible for deduction under Section 80C, up to the maximum limit of ₹1.5 lakh. These FDs have a lock-in period of five years and offer guaranteed returns.

Note: Interest earned on these FDs is taxable, unlike instruments like PPF or EPF.

2. TDS on FD Interest

If the interest earned on your FDs exceeds ₹50,000 (₹1 lakh for senior citizens) in a financial year, the bank deducts 10% TDS. Note that is is applicable for FY 2025-26. Fixed Deposit TDS exemption threshold till March 2025 is ₹40,000 for regular citizens and ₹50,000 for senior citizens. However, by submitting Form 15G/15H, you can avoid TDS if your income is below the taxable threshold. If you fall into the new tax regime, the minimum tax slab has been increased from ₹3 lakh to ₹4 lakh. If you earn below ₹4 lakh, the bank won't deduct any TDS even if you exceed the the FD TDS exemption threshold.

3. Senior Citizen Benefits

Senior citizens enjoy additional benefits:

• Higher interest rates on FDs.
• TDS exemption of up to ₹1 lakh on interest income under Section 80TTB.

4. Cumulative FDs for Tax Planning

Opt for cumulative FDs, where interest is compounded and paid at maturity. This delays tax liability, as the interest is taxable only on maturity.

Maximizing Tax Benefits: Key Strategies

• Combine the benefits of home loans and tax-saving FDs to utilize the full Section 80C limit of ₹1.5 lakh.
• First-time homebuyers should take advantage of Section 24(b) and 80EEA for additional deductions.
• Senior citizens should focus on tax-saving FDs while leveraging the benefits under Section 80TTB.