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

July 21, 2025

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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.

Final Thoughts

Home loans and fixed deposits are not just financial products; they are tools that can help you save significant amounts in taxes while achieving your financial goals. By understanding and leveraging the deductions under Sections 80C, 24(b), and other relevant provisions, you can optimize your tax outgo and secure your future.

Tax planning requires careful consideration and timely execution. Start early, stay informed, and consult with a financial advisor to make the most of these opportunities.

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FAQs

1. What is the maximum tax deduction I can claim with a home loan?

The maximum deduction you can claim with a home loan is ₹3.5 lakh annually, which includes ₹1.5 lakh under Section 80C for principal repayment and ₹2 lakh under Section 24(b) for interest payment.

2. Are tax-saving FDs better than ELSS for tax-saving purposes?

Tax-saving FDs provide guaranteed returns and are ideal for risk-averse investors. However, the interest earned is fully taxable. On the other hand, ELSS (Equity Linked Savings Scheme) offers the potential for higher returns, however, theirs is considerable risk involved and returns are not fixed or guaranteed.

3. Is the interest earned on tax-saving FDs taxable?

Yes, the interest earned on tax-saving FDs is taxable. It is added to your total income and taxed as per your income tax slab. Banks also deduct TDS at 10% if the interest exceeds ₹50,000 in a financial year (₹1 lakh for senior citizens). This TDS exemption limit is applicable only for FY 2025-26. Till March 2025, the TDS exemption limit for FD stands at ₹40,000 for regular citizens and ₹50,000 for senior citizens.

4. What happens if I sell my house within five years of possession?

If you sell your property within five years of possession, all deductions claimed under Section 80C for principal repayment, stamp duty, and registration charges will be reversed. The amount will be added back to your taxable income in the year of sale, and you may incur capital gains tax.

5. Can NRIs claim tax benefits on home loans in India?

Yes, Non-Resident Indians (NRIs) can claim tax deductions on home loans in India under Section 80C and Section 24(b), provided the property is purchased in India. However, the tax benefits will be subject to Indian tax laws, and the income must be reported in their Indian tax returns.

6. What is the lock-in period for tax-saving FDs, and can I break them prematurely?

Tax-saving FDs have a mandatory lock-in period of five years, and premature withdrawal is not allowed. Ensure that the funds you invest in these FDs are not needed for liquidity during the lock-in period.

7. Can I submit Form 15G/15H to avoid TDS on FDs?

Yes, if your total income is below the taxable limit, you can submit Form 15G (for individuals) or Form 15H (for senior citizens) to your bank to avoid TDS on FD interest. However, these forms must be submitted at the beginning of the financial year.

8. What are the benefits of affordable housing under Section 80EEA?

Under Section 80EEA, you can claim an additional deduction of up to ₹1.5 lakh on interest paid for affordable housing loans, provided the property’s stamp duty value is ₹45 lakh or less. This deduction is available for loans sanctioned between April 1, 2019, and March 31, 2024.

9. Are there any prepayment charges on home loans?

Most banks do not levy prepayment charges on floating-rate home loans taken by individuals. However, fixed-rate home loans may attract prepayment fees, depending on the lender.

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