Section 24 of Income Tax Act: Tax Deductions from House Property Income
Updated: Aug 2
Owning a house can indeed be very rewarding; not in real estate value only but for tax benefits. Section 24 of the Income Tax Act has a very exciting benefit for the house owners in the form of deductions from income arising from house property. This provision comes especially handy for those having rental properties or who have availed of a home loan. In this article, we will explain all the finer points of Section 24 in detail and also explain how one can increase the amount of savings in tax and also deal with property-related finances more efficiently.
Table of Content
Overview of Section 24 of Income Tax Act
Section 24 of the Income Tax Act, 1961, contains a specific provision that enables the taxpayer to have deductions from income generated from house property. Basically, the approach of this section is to provide tax relief on interest paid for home loans so that ownership of houses may become easier and, therefore, encourage investment in real estate. It is often referred to as "Deductions from Income from House Property."
Section 24 deductions play an important role in lowering a net taxable income derived from a house property which is let out or self-occupied. Section 24 principally seeks to reduce the financial pressure on the shoulders of people who return loans with interest, and thus help in the growth and development of the housing sector.
Types of Income Considered under House Property:
Section 24 generally allows deductions against income from house property, which includes:
Rental Income: It considers any income generated from the letting of a property. This is the most general source of house property income and includes any payment received in respect of a lease of property, whether it be residential or commercial.
Deemed Rental Income: In some cases, even when the property has not been rented out, it is considered to have been let out. For instance, if the assessee has more than two houses, in that case, leaving aside the self occupied property, only one property can be treated as self occupied and claimed nil income and rest would be presumed to be let out and notional rental income would be considered based on the potential rent such house can generate.
Types of Deductions Available under Section 24 of Income Tax Act
As far as deductions from income earned from house property under the Income Tax Act are concerned, mainly two types of deductions are commonly in use:
Interest on Home Loan:
Eligibility: Section 24 deduction would be available on the interest paid on capital borrowed for the purchase, construction, repair, renewal, or reconstruction of property.
Amount: There is no maximum limit for the interest that may be claimed for a rented property. In the case of self occupied property, deduction up to INR 2 lakh per annum is allowed on maximum basis under Section 24 of Income Tax Act.
Claiming Process: The assessee is required to furnish the information regarding interest paid on the home loan during the year to claim the deduction in their income tax returns.
Interest on Home Loan:
Eligibility: This deduction is automatically available to any person earning rental income from a property.
Amount: The standard deduction is fixed at 30% of the Net Annual Value of property. Net Annual Value shall be computed as the gross rent received minus Municipality taxes paid during the year.
Purpose: It covers expenditure that is normally incurred in maintaining the rental property, including repairs, insurance, and other incidental expenses in regard to the property. The deduction is substantial for several reasons since it is allowed without correlating it with the actual expenditure incurred, providing a straight-line reduction to make the tax calculations easier.
Who can Claim Deductions under Section 24 of Income Tax Act?
Coming to the deductions allowed under Section 24 of the Income Tax Act while computing income from house property, there are certain conditions and eligibility criteria that need to be met by the taxpayer.
Property Owners: The deductions provided under Section 24 are for those individuals who are property owners and receive income that originates from such property, either as rental income or as deemed rent in case the property is considered to have been let out.
Co-owners: In the case of jointly owned property, each such co-owner can simultaneously avail the deduction on account of interest on home loan and the standard deduction, proportionately speaking, against his or her share in the property if such co-owners happen to be co-borrowers as well.
Conditions and Limitations
Purpose of the Loan: The loan must have been taken for acquiring, constructing, repairing, renewing, or reconstructing the property. Only interest on such a loan is liable to be deducted.
Possession or Completion: The construction or acquisition of property must be completed within 5 years from the end of the financial year in which the loan was taken for the deduction on interest. It is reduced from INR 2 lakhs to INR 30,000 if this condition is not met with regard to interest on self-occupied property.
Limitation on Self-occupied Property: The maximum deduction for interest on a loan for a self-occupied property is INR 2 lakhs per annum. There is no upper limit for rented or deemed to be rented properties.
Standard Deduction: The standard deduction of 30% on the net annual value is applicable only to properties generating rental income. It is not available for a self occupied property where the annual value is considered as nil.
Pre-construction Interest: The interest paid prior to the year of completion of construction is allowed as a deduction in 5 equal installments from the year in which the construction is completed.
Number of Houses: In the case of self-occupation, if any individual owns two properties, one of them shall be treated as self occupation for which deduction for interest can be claimed up to INR 2 lakhs. Others will have to be considered as rented out, deemed to be let out, and notional rent received is subject to tax with deductions for actual interest paid without any limit.
Calculation of Deductions under Section 24 with Examples
Calculations of deductions from income under Section 24 pertaining to house property under the Income Tax Act are defined by a few simple steps. The interest on home loans and standard deduction, in particular, would become key areas of focus. Here's a step-by-step guide followed by examples that explain the process:
Step-by-Step Calculation:
Determine Gross Annual Value (GAV):
For a let-out property, it is normally the rent received.
In the case of a self occupied property GAV is considered as nil. Allowance for Municipal Taxes Paid: From the GAV, deduct municipal taxes paid during the year, subject to the conditions that these taxes are paid by the owner.
Computation of Net Annual Value NAV: From the GAV, deduct the municipal taxes to arrive at the NAV.
Deduction under Section 24(a): In case of rental property, deduct 30% of the NAV as a standard deduction. This deduction is not applicable in case of self occupied properties.
Deduct Interest on Home Loan: From the NAV after deducting standard deduction, deduct the amount of interest paid on the home loan during the financial year .
Income from House Property: The result after deducting the home loan interest will be the income from house property which will be charged to tax.
Example 1: Rental Property
Annual rent received: INR 5,00,000.
Municipal taxes paid during the year: INR 20,000.
Interest paid on home loan: INR 1,50,000.
Calculation:
Gross Annual Value (GAV) = INR 5,00,000
Net Annual Value (NAV) = GAV – Municipal Taxes = INR 5,00,000 – INR 20,000 = INR 4,80,000
Standard Deduction = 30% of NAV = 30% of INR 4,80,000 = INR 1,44,000
Income from House Property before Interest Deduction = NAV – Standard Deduction = INR 4,80,000 – INR 1,44,000 = INR 3,36,000
Income from House Property after Interest Deduction = INR 3,36,000 – INR 1,50,000 = INR 1,86,000
Example 2: Self-Occupied Property
Interest paid on home loan: INR 1,80,000
Calculation:
Gross Annual Value (GAV) = INR 0 (since the property is self occupied)
Net Annual Value = INR 0
No standard deduction applicable
Income from House Property = NAV - Interest Deduction = INR 0 - INR 1,80,000 = (INR 1,80,000). But loss on account of interest deduction can be restricted to INR 2,00,000 per annum in case of self occupied property.
How to Claim Deductions under Section 24? Required Documentation
As per the Income Tax provisions, the taxpayer is required to maintain proper documents related to deductions claimed under Section 24 while filing returns pertaining to income from house property. Here's a list of the documents you need to keep handy:
Ownership Documents: Title deeds or property registration deeds to prove ownership.
Loan Documents:
Sanction letter from the concerned bank or financial institution.
Loan agreement stating the terms and conditions.
Annual statement of home loan, which includes break-up of principal and interest.
Rent Agreement (if applicable):
Lease or rent agreement in case the property is let out mentioning the name of tenant, amount of rent, period of lease.
Rent Receipts: Receipts for such rent received during the financial year.
Municipal Tax Receipt: Receipts pertaining to municipal or property tax paid by the assessee during the year, clearly indicating the date of payment and the financial year to which it relates.
Bank Statements: Statements supporting the transactions relating to rent received and EMI, if not distinctly reflected in the home loan statement.
Common Mistakes to Avoid
When calculating the deductions in respect of income from house property under Section 24 of the Income Tax Act, there are some mistakes that many taxpayers may incur. Here are a few common mistakes to avoid while filing tax returns accurately and avoiding errors:
Not Separating Principal and Interest Components: Equated installments of home loan repayment consist of the principal and interest component. Only the interest component is allowed as a deduction under Section 24. Many a time, the entire EMI is claimed as a deduction.
Ignoring Pre-construction Interest: Interest during the pre-construction period can be claimed as a deduction in five equal annual installments, commencing from the year in which the construction is completed. Ensure that the deduction is claimed from the correct year.
Not Keeping Proof of Rent Received: In case of let-out property, failure to maintain proper rental receipts or bank statements showing the rent received may prove troublesome in case of any inquiry by the taxation department.
Not Declaring Deemed Rent: If someone owns more than one house property and declares one as self occupied, they are required to declare 'deemed rent' from the other properties even if the same is not actually let out. Not doing so will raise the red flag on under-declared income.
Wrongful Deduction Claims of Self-occupied Property: Interest on home loans is only allowed in the case of self-occupied properties. The standard 30% is only applicable for let-out properties. Some taxpayers wrongfully try to claim this in the case of self-occupied properties.
Not Updating Rental Agreements: Maintaining old agreements for rent or not updating the rental amounts within them, and in the return as well, will lead to misrepresentations of income.
FAQ
Q1. What is Section 24 of the Income Tax Act?
Section 24 provides deductions from income from house property, allowing taxpayers to reduce their taxable income by the amount of interest on home loans and a standard deduction for maintenance.
Q2. Who can claim deductions under Section 24?
Property owners who earn income from house property, either through rent or by having the property deemed let out, are eligible to claim deductions under Section 24.
Q3. What are the major deductions available under Section 24?
There are two major deductions: interest on home loans and a standard deduction of 30% of the net annual value for maintenance, applicable only on rental income.
Q4. Is there a limit on the amount of interest deductible under Section 24 for a self-occupied property?
Yes, in the case of a self occupied property, the interest allowed as deduction is restricted to ₹2 lakhs per annum.
Q5. Can I claim deduction for interest for a property under construction?
The interest paid during the pre-construction period can be claimed in five equal installments commencing from the year in which the construction is completed.
Q6. How will the standard deduction be calculated under Section 24?
The standard deduction is automatically 30% of the net annual value (NAV), which is the gross annual value minus municipal taxes. This deduction is applicable only to properties that generate rental income.
Q7. What if I have more than one house property?
If you have more than one house property, only one can be considered as self-occupied (with a nil income under Section 23). Other properties are considered rented out (even if not actually rented), and income from them must be declared.
Q8. What happens if I don’t claim the deduction for which I am eligible?
If a deduction for which you are eligible is not claimed, a revised return may be filed within the stipulated time to claim such deductions, and consequently, to alter your taxable income accordingly.
Q9. Can both the co-owners of the property claim deductions under Section 24?
Yes, in the case of co-ownership of the property, if both the owners are contributing to the home loan, then both can claim deductions on the interest paid, proportionate to share in the said loan.
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