Section 24 of the Income Tax Act: Understanding Deductions from House Property Income
Updated: Oct 22
Every Indian wants to possess their own house, either by construction or purchase. Purchasing a home not only reflects a prosperous existence but also gives you access to an asset whose value increases annually. Additionally, it might offer a reliable source of revenue through rent. Meeting the upfront costs associated with purchasing a property, however, might be difficult, particularly given the exorbitant pricing. In addition to being convenient, house loans have tax advantages such as Section 24, which exempts interest repayments. Read this blog post to learn more about Income Tax Section 24.
Table of Contents
Income from House Property
The following income is subject to taxation under the Income-tax Act of 1961's "Income from House Property" heading.
Earned rental income from a rental property
The annual value of a property that is "deemed" to be rented out for income tax reasons (if you own more than two houses, the extra properties will be deemed to be rented out)
When the interest on a home loan is deducted, the annual worth of a self-occupied property is zero or even negative. The anticipated rental revenue, if the property is rented out, is the property's annual worth. If you own more than two residential homes, the extra properties will be considered rental property and their annual value will be deducted from your taxable income. If the property is rented out, your gross annual value (GAV) is what you get paid. The fair rent for a comparable property is your gross annual value if the property is thought to be rented out.
What is Section 24 of the Income Tax Act?
Homeowners can deduct interest paid on their loans from their taxes under Section 24 of the Income Tax Act. This section is titled "Deduction from Income from House Property" precisely for this reason. In the event of a self-occupied house, this clause allows for a maximum deduction of Rs. 2 lakh on interest paid towards the home loan for each fiscal year. If someone is renting a home, they may choose to deduct all of the interest they pay on their mortgage.
Deductions under Section 24 for a House Property
You can deduct specific expenses from your income on home property under Section 24. The following list of deductions is provided:
Municipal tax: The annual amount paid to the local municipal corporation is known as the municipal tax. To determine the net yearly worth of the house property, the gross annual value must be subtracted from the municipal taxes. Only municipal taxes that were paid during that fiscal year and borne by the owner are eligible for deduction. Net Annual Value (NAV) is the amount that remains after local taxes are subtracted from GAV.
Standard Deduction: The standard deduction is 30% of the previously determined NAV. Regardless of how much more or less you actually spend on the property, you can still deduct this 30%. This deduction is therefore made regardless of the real costs you may have paid for things like insurance, maintenance, energy, water supply, etc. In the case of a self-occupied house property, the standard deduction is likewise zero because the annual value is zero.
Interest on the home loan is deductible for the property: Property owners who live in their home or where their family resides can deduct up to Rs. 2 lakh from the interest paid on their home loan. When the house is unoccupied, the same rules are in effect. The whole interest paid on your house loan is deductible if you have rented out the property.
The following table shows tax deductions under Section 24:
Application | Deduction Available |
A rented property bought with a home loan | Total home loan interest |
Rented property bought with one’s own money. | 30% standard deduction on NAV |
Self-occupied property bought with housing loan | Rs. 2 lakh as maximum deduction on home loan paid in a financial year |
Conditions to Claim Deductions under Section 24
To be eligible for deductions under Section 24 of up to Rs. 2 lakh on self-occupied residential properties, you have to meet the following requirements:
You must have an interest certificate to validate payable interest towards your property loan.
For you as a borrower to construct or purchase a residential property, your home loan must be approved on or after April 1, 1999.
The residence must be purchased or built within five years of the financial year in which the loan was disbursed. You are eligible to receive a Rs. 30,000 tax deduction if the aforementioned requirements are not met.
You must meet these requirements in order to be eligible for the interest deduction of up to Rs. 30,000:
You are only eligible for a deduction of up to Rs. 30,000 if you borrowed money on or after April 1, 1999, for the building or acquisition of a property and it was not finished within five years of the end of the financial year when the money was borrowed.
This benefit is available to taxpayers who took out home loans for renovation, renewal, or repair of their residence on or after April 1, 1999.
This clause allows you a deduction if you took out a loan prior to April 1, 1999, for the purpose of building or buying a home.
Exceptions to Section 24
You may request an exemption for the entire amount of interest you are paying, with no upper limit, if you are not residing in the residence.
You can only claim tax exemption on interest payments up to Rs. 2 lakhs, while filing tax return, if you live in another home or rent a rental property in the city where you work and the house is not occupied by you because you are employed or have a business in another town.
There isn't a commission or brokerage deduction for setting up the tenancy or loan.
For you to be eligible for the maximum deduction on the loan interest amount, the house must be purchased or built within three years of receiving the loan. If the building or acquisition is not finished in three years, you will only be eligible to receive Rs. 30,000 rather than Rs. 2 lakh.
An interest certificate for the loan you are taking out is required.
Pre-Construction Interest on a House Property
There is a deduction available for pre-construction interest when you have taken out a loan to build or buy a home. Pre-construction interest is the interest paid on a housing property while it is still being built. Interest paid during the building phase is not deductible in those years; instead, it accumulates and becomes deductible after five equal installments starting in the year that construction is finished. If there is a loan for renovations or repairs, this is not permitted. In any case, the total pre-construction interest and housing loan interest that can be claimed in a year for a self-occupied house cannot be more than Rs 2 lakh. Commencing from the year the house is acquired or the construction is finished, there are five equal installments available for the deduction of this interest.
Illustration: Computing Income from a House Property
X chooses to take up a 4 lakh rupee home loan, with a yearly interest payment of 2 lakh rupees. He spent Rs. 1.5 lakh in interest during the building of this home. He is earning Rs. 30,000 a month in rental revenue from this home, which he has listed for rent. For this property, he additionally pays Rs. 10,000 as municipal tax. Let's use this data to determine X’s salary based on two variables.
These include:
Rental income
Self-occupied house
Using the formula below, you can determine X's total income from his rental property.
Housing property income is calculated as follows: Net Annual Value – standard deduction – (interest on the home loan plus pre-construction interest)
The results of calculating the income from house property are displayed in the table below.
Particulars of Calculations | Self-Occupied Property | Rental Property |
Gross Annual Value (GAV) | Nil | Rs. 3,60,000 |
Less: Municipal taxes | Nil | Rs. 10,000 |
Deduction under section 24: |
|
|
Less: (a)Standard deduction @30% of NAV | NA | Rs. 1,05,000 |
Less: (b)Interest on Borrowed Capital
| Rs. 2,00,000 | Rs. 2,00,000 |
Less : Pre-construction interest | Rs. 30,000 | Rs. 30,000 |
Overall Interest restricted up to | 2,00,000 | 2,30,000 |
Income/(Loss) from House Property | (2,00,000) | 15,000 |
Notably, if the loan taken is less than Rs. 35 lakh and the cost of the house is less than Rs. 50 lakh, Section 80EE permits an extra exemption of Rs. 50,000. This provision will only be accessible starting in the 2020–21 fiscal year. It's interesting to note that the individual whose name the house and the loans are only may qualify for these tax advantages. The inheritor is not entitled to any tax benefits if the person passes away and leaves behind property and debt obligations.
Conclusion
The Income Tax Act's Section 24, which deals with income from housing property, is crucial in figuring out your taxable income. The section adds to the general structure of income taxation by outlining the allowable deductions and exemptions for such income. To limit your tax liability within the bounds of the law and to ensure compliance with tax regulations, you must understand the terms of Section 24.
FAQ
Q1. Can I claim tax benefits under Section 24 every year?
Yes, you are eligible to deduct taxes from your home loan interest until the end of the loan repayment term under Section 24 of the Income Tax Act.
Q2. Can I claim both Section 24 and 80EE?
You may make a claim for benefits under both Section 24 and Section 80EE if you meet all the requirements outlined in these sections.
Q3. What is the maximum deduction limit under Section 24 for a self-occupied property?
The maximum deduction limit under Section 24 for a self-occupied house is Rs. 2, 00,000.
Q4. Can co-owners of house property claim tax deductions under Section 24 jointly?
In the case of joint ownership, you may only deduct taxes if you are each other's co-borrower and co-owner in proportion to your respective shares of the property. To claim tax benefits under Section 24 of the Income Tax Act, your name needs to be on the loan book.
Q5. What is the pre-construction period?
"Pre-construction period" refers to the time frame that starts on the borrowing date and ends on March 31st, the day before the date of acquisition, loan payback, or construction completion, whichever comes first.
Q6. Is deduction available on the home loan principal?
No, under this clause, only the interest part is deductible. A maximum deduction of Rs. 150,000 from the loan principal amount is allowed under section 80C.
Q7. Can we claim a deduction of interest for two house properties owned by the taxpayer?
A deduction for interest paid on borrowed capital for two properties that are owned and occupied by the owner is permitted. The total deduction allowed by this clause, which is either Rs. 30,000 or Rs. 2,00,000, will not change, though.
Q8. Is Section 24 applicable for under-construction property?
No, under-construction homes are not directly covered by Section 24 in terms of deducting interest paid on a housing loan during the construction phase. On the other hand, Section 24 allows you to claim deductions for interest paid throughout both the construction and post-construction phases after the work is finished and you have possession (B).
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