Fixed vs Floating Interest Rate: Which is Better for You?

May 22, 2025 By: Loan Advisor

1. Introduction

Taking a home loan doesn’t just help you buy your dream house—it also offers attractive tax benefits on home loans that can lead to substantial savings. This dual advantage of property ownership and income tax relief makes home loans a smart financial move for many individuals and families.

When you understand how home loan tax deductions work, you can reduce your taxable income through claims on both the principal and interest components of your EMIs. The Income Tax Act provides multiple sections that allow borrowers to save money annually, especially if they are first-time buyers or investing in specific types of properties. By learning about these benefits, you can better plan your finances and make the most of your home loan.

Whether you’re a salaried professional or self-employed, knowing how to maximize home loan tax savings can help you manage your EMIs more efficiently and increase your overall savings. In the sections ahead, we’ll break down the key tax deductions available, who qualifies for them, and how to claim them the right way.

2. Overview of Home Loan Tax Benefits in India

Home loans in India not only help you buy your dream home but also offer valuable home loan tax exemptions that reduce your overall tax burden. The Income Tax Act provides various provisions to help borrowers save on both principal and interest repayments.

Here’s a quick breakdown of the key tax sections:

• Section 80C: You can claim a deduction of up to ₹1.5 lakh annually on the principal portion of your home loan EMIs. This benefit applies after the property is constructed and possession is taken.
• Section 24(b): Offers a deduction of up to ₹2 lakh per year on the interest paid for a self-occupied home. For rented properties, there is no limit on the interest amount, but the set-off on loss from house property is restricted to ₹2 lakh.
• Sections 80EE and 80EEA: These sections provide extra tax relief on interest paid by first-time homebuyers, depending on the home value and loan amount.

3. Tax Deduction on Principal Repayment (Section 80C Home Loan)

Under the provisions of Section 80C of the Income Tax Act, home loan borrowers are eligible to claim deductions on the principal repayment portion of their EMIs. This tax benefit is available to individual taxpayers and Hindu Undivided Families (HUFs), and is a widely used way to save on taxes while repaying a home loan.

The maximum deduction allowed under Section 80C home loan is ₹1.5 lakh per financial year. However, this limit is shared with other investments and payments like life insurance premiums, ELSS, PPF, and tuition fees. So, it’s important to account for your total eligible expenses under Section 80C when planning your tax savings.

To qualify for this deduction, the home must be self-occupied, and the benefit can only be claimed after the property’s construction is completed and possession has been taken. If you sell the property within five years from the end of the financial year in which possession was obtained, the tax benefit claimed earlier will be reversed and added to your income in the year of sale.

Claiming the Section 80C home loan deduction helps reduce your tax burden while moving closer to full homeownership—making it a smart step toward better financial health.

4. Tax Deduction on Interest Paid (Section 24b Home Loan Interest)

Under Section 24 of the Income Tax Act, you can claim a tax deduction on the interest paid towards your home loan, commonly referred to as the section 24 home loan interest benefit. This deduction helps lower your taxable income and ease the financial burden of your loan repayments.

For self-occupied properties, the maximum deduction allowed under Section 24(b) is ₹2 lakh per financial year. In the case of rented or let-out properties, there is no upper limit on the interest deduction; however, the total loss that can be set off under “Income from House Property” is restricted to ₹2 lakh per year. Any excess loss can be carried forward for up to eight years.

You can also claim a deduction on pre-construction interest—the interest paid on the home loan before the property’s construction is completed. This pre-construction interest is allowed as a deduction in five equal installments starting from the year you take possession.

To be eligible, the home loan should be for purchasing, constructing, repairing, or reconstructing a residential property, and the construction must be finished within five years from the end of the financial year in which the loan was taken.

Taking advantage of the Section 24 home loan interest deduction can significantly reduce your tax outgo and make your home loan repayments more manageable.

5. Additional Deductions Under Section 80EE / 80EEA: First-Time Homebuyer Tax Benefit

The government provides special tax incentives for first-time homebuyers through Section 80EE and Section 80EEA, designed to make homeownership more accessible. These sections offer additional deductions on the interest paid on home loans, supplementing the standard benefits under Section 24(b).

Under Section 80EE, eligible borrowers can claim a deduction of up to ₹50,000 per financial year on home loan interest. To qualify, the loan must be sanctioned within the specified government time frame, with the loan amount not exceeding ₹35 lakh and the property value capped at ₹50 lakh. Importantly, you cannot claim this deduction if you’ve already availed benefits under Section 80EEA or Section 24 for the same loan.

Section 80EEA allows a higher deduction of up to ₹1.5 lakh on interest paid, applicable to loans sanctioned between April 1, 2019, and March 31, 2022. The property value for this benefit must not exceed ₹45 lakh, and it’s exclusively for first-time homebuyers.

To take advantage of these first-time homebuyer tax benefits, make sure you fulfill all eligibility requirements and submit the necessary documentation during tax filing.

These deductions can significantly increase your tax savings, reducing the overall cost of purchasing your first home.

6. Tips to Maximize Home Loan Tax Benefits

Making the most of your home loan tax benefits can greatly ease your financial load and boost your savings. Here are some practical ways to maximize home loan tax savings and fully utilize available deductions:

• Consider a Joint Home Loan: Taking a home loan jointly with your spouse or family member lets both parties claim separate tax deductions on principal repayment under Section 80C and interest payments under Section 24(b). This approach can potentially double your tax benefits.
• Select the Appropriate Property Type: Tax advantages differ between self-occupied and rented properties. Self-occupied homes have capped interest deductions, while rented properties allow unlimited interest deductions but limit loss set-off. Knowing these differences helps you plan your home purchase and tax strategy effectively.
• Time Your Purchase and Possession Wisely: Principal repayment deductions begin only after you take possession, and interest deductions apply from the year you receive the loan. Proper timing of your property possession and loan disbursement can maximize your eligible tax benefits.
• Keep Documentation Organized: Maintain updated loan statements, possession certificates, and property documents. Accurate documentation ensures hassle-free tax claims and prevents any processing delays.

7. Mistakes to Avoid When Claiming Tax Benefits

Claiming tax benefits on your home loan can lead to substantial savings, but mistakes during the process can cause delays, rejections, or even penalties. To avoid these issues, be mindful of these common errors:

• Incomplete Documentation: Submitting incomplete or inaccurate documents is a major reason for claim rejections. Ensure you provide all necessary paperwork, including loan statements, possession certificates, and payment proofs. Proper documentation is essential for a smooth approval process.
• Wrong Claims on Under-Construction Properties: Many borrowers wrongly claim deductions on principal repayment before possession of an under-construction property. While interest paid during the construction phase is eligible for deductions, principal repayments under Section 80C can only be claimed after the property is complete and possession is taken. Incorrect claims may attract scrutiny from tax authorities.
• Ignoring Pre-Construction Interest: Interest paid before possession, known as pre-construction interest, can be claimed as a deduction but must be spread over five years starting from the year you take possession. Not tracking or claiming this properly means losing out on valuable tax savings.

Avoiding these mistakes will help you maximize home loan tax benefits effectively, making your tax filing hassle-free and more rewarding.

Frequently Asked Questions (FAQs) on Fixed vs Floating Interest Rates: Which Option Suits You Best?

1. What does a fixed interest rate on a home loan mean?
   A fixed interest rate stays the same throughout the loan tenure, ensuring stable EMIs and protecting borrowers from market rate changes.
2. What is a floating interest rate?
   A floating (or variable) interest rate varies over time based on the lender’s benchmark rate or market conditions, causing EMIs to rise or fall accordingly.
3. Which is better: fixed or floating interest rate?
   The best choice depends on your financial goals, risk tolerance, and current market trends. Fixed rates offer predictability, while floating rates may be cheaper if interest rates decline.
4. Can I switch from a fixed rate to a floating rate during my loan tenure?
   Yes, many lenders permit switching between fixed and floating rates, although this may involve certain terms and fees.
5. How does a floating interest rate impact my monthly EMI?
   Your EMI can increase or decrease with floating rates depending on fluctuations in the benchmark lending rate.
6. Are fixed interest rates typically higher than floating rates?
   Usually, fixed rates start off higher than floating rates as lenders factor in the risk of guaranteeing a fixed rate.
7. Which interest rate is preferable for long-term home loans?
   Fixed rates offer stability for long durations, but floating rates might help save money if market rates drop over time.
8. How do economic factors influence floating interest rates?
   Floating rates are linked to external benchmarks like the central bank’s repo rate, and they change in response to economic shifts.
9. Do fixed interest rates provide better tax benefits than floating rates?
   Tax deductions apply equally to interest paid under both fixed and floating rates, so there’s no difference in tax benefits.
10. What factors should I consider when choosing between fixed and floating interest rates?
    Evaluate your financial stability, loan tenure, market conditions, and willingness to take risks to decide the right interest rate option for you.