You have some cash in hand because of the recent annual performance bonus that you received. You have not yet decided how to use that money. You have no credit card or personal loan which needs to be settled at a high priority. You only have a home loan but you are not planning to part prepay it because you will lose out on tax benefits.
This is a common refrain among home loan borrowers. They do not want to prepay their loan just because of associated tax benefits. I do not deny that home loan repayment comes with tax benefits bringing down the effective cost of loan through calculating Home Emi Calculator.
However, sometimes, these tax benefits on home loans can be overrated.
Tax Benefits of Home Loans
Deduction in total income by up to Rs 1.5 lacs for principal repayment under Section 80C of the Income Tax Act
Up to Rs 2 lacs for interest payment for a self-occupied property under Section 24 of the Income Tax Act. For a let-out or a deemed let-out property, there is no cap on tax benefit for interest payment.
You may get limited Tax Benefit for Principal Repayment
You may be re-paying more than Rs 1.5 lacs of principal in a financial year. The tax benefit is capped at Rs 1.5 lacs per financial year.
Even if you are paying less, your other Section 80C investments such as PPF, EPF, ELSS, insurance premium etc may exhaust the entire or major portion of Rs 1.5 lacs even before principal repayment comes into picture.
You get tax benefit for principal repayment only once you get possession of the house. Principal repayment done before the financial year in which you got possession of the house does not get you any tax benefit. This assumes important for tax-payers who have purchased under-construction property.