Home loan principal amount: Meaning, importance, tax benefits

Those planning to buy a property by taking home loan need to understand the nitty-gritty of this financial service. Getting clarity about various components of home loan is one of the first steps in understanding the process. First, we would understand what home loan principal amount is and learn about every aspect of the home loan.

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Home loan principal amount is the amount banks lend to their customers.

The amount you request the bank to sanction so that you can purchase your home is known as the principal amount. Suppose you are buying a property worth Rs. 50 Lakh and requesting the bank to issue a home loan of Rs. 40 Lakh. When the bank agrees to provide you the said amount, i.e., Rs. 40 Lakh, it is called as home loan principal amount.

It is pertinent to mention that banks won’t issue an amount you ask for as home loan. A lot of scrutiny is done to determine your loan eligibility. The bank later decides the amount it is going to lend you.

Home loan has two components; principal is one of them.

Banks charge a fee for their services. This is where the second component of the home loan amount kicks in. This fee is known as home loan interest. There is an annual interest you need to pay on your home loan principal amount. Suppose your bank charges 8% annual interest on the home loan principal amount of Rs. 40 Lakh, then you will be paying Rs. 40, 294, 82 for a repayment tenure of 20 years.

EMI does not constitute the components in the same proportion.

Typically, banks charge higher interest during the initial years of the repayment cycle. This is because at the start of the loan repayment, the interest is calculated on the entire principal amount. As the borrower continues paying, the principal amount reduces, and consequently the principal amount payment is higher towards the latter part of the repayment cycle.

Tax benefits on home loan principal

Tax benefits are offered for the payment of both the components of the home loan. However, different sections are applicable to claim these deductions. For home loan principal amount payment, the borrower can claim tax deductions under Section 80C of the Income Tax (I-T) act.

See also: 11 key facts about home loans in India

Deduction amount is capped at Rs. 1.5 Lakh.

Irrespective of how much money you pay as the home loan principal component of your loan, you can avail Rs. 1.50 Lakh as tax deduction under the I-T law in India.

FAQs

What is home loan principal amount?

The money you originally borrow from a bank is the home loan principal amount.

How to calculate home loan principal amount?

Borrowers can check the loan amortisation table sent by the bank to understand the principal, or interest repayment. They can do so by applying the following formula. Monthly EMI payment - interest payment = Principal amount Loan balance – principal payment = Principal balance