Understanding Section 24 of the Income Tax Act: Exemptions and Particulars

Section 24 of Income Tax Act is a blessing for homeowners as it lets them claim a deduction of up to Rs. 2 lakhs on the interest of their home loan if they themselves or their family resides in the property they are claiming it against.

Unfolding the three distinct situations that lead to the income from house property, under Section 24 of the Income Tax Act:

The first situation occurs when the property is rented out, and the owner receives income in the form of rent. In this case, the gross annual value (GAV) is determined by the actual rent received. The annual value, which is used for tax purposes, is calculated by subtracting the municipal taxes paid from the GAV.

The second situation arises when an individual owns more than one property and a property is not rented out but is considered "deemed to be let out" for tax purposes. Here, the GAV is determined based on the reasonable rent that a similar property in the same location would generate.

The third situation is when the property is self-occupied, meaning the owner resides in it. In this case, the GAV is considered to be nil, indicating that no income is generated from the property.

Distinguishing the deductions under house property

1) Municipal taxes refer to the annual amount paid to the municipal corporation of the specific area. To determine the net annual value of the house property, these taxes are deducted from the gross annual value. The deduction for municipal tax is applicable if the owner has borne the expense and made the payment during the relevant financial year.

2) A standard deduction of 30% is granted on the net annual value, irrespective of the specific expenditures involved, such as insurance, repairs, electricity, water supply, and other property-related costs. When it comes to a self-occupied house property with a zero annual value, the standard deduction is likewise non-existent.

3) Homeowners can claim a deduction of up to Rs. 2 lakhs on the interest paid on their home loan if they or their family reside in the house property. The same deduction applies when the property is vacant. If the property is rented out, the entire interest on the home loan is eligible for deduction.

However, if the conditions for the Rs. 2 lakh rebate are not met, the deduction on interest is limited to Rs. 30,000. The requirements encompass the utilization of the home loan for acquiring or building the property, the loan being acquired on or after 1st April 1999, and the completion of the purchase or construction within a span of 5 years from the conclusion of the financial year in which the loan was procured.

Exceptions under Section 24 Section 24 of the Income Tax Act provide exceptions and regulations regarding deductions for house property, ensuring clarity on the tax implications.

Key points summarize the exceptions in the section 24 of income tax Act:

Unoccupied House Exemption:

If the house remains unoccupied and is not used by you, you are eligible to claim an exemption for the entire interest amount paid towards the loan, without any upper limit.

Non-Occupancy Due to Employment/Business:

In cases where you do not reside in the house due to employment or business reasons in another town or city, and you live in a different property or a rented accommodation there, you can claim tax exemption on the interest paid up to a maximum of Rs. 2 lakh.

Non-Deductibility of Brokerage or Commission:

It's important to note that there are no deductions allowed for brokerage or commission incurred in arranging the loan or finding a tenant for the house property.

Timeframe for Completion of House:

To avail of the maximum deduction on the loan interest amount, you must purchase or complete the construction of the house within 3 years from the time the loan was taken. Not meeting these conditions will result in a deduction limit of Rs. 30,000 instead of the higher threshold of Rs. 2 lakhs.

Requirement of Interest Certificate:

It is essential to obtain an interest certificate for the loan you have availed to claim deductions accurately and comply with the provisions under Section 24.

Individuals can avail of an extra deduction of Rs. 50,000 under Section 80EE if the cost of the house is lower than Rs. 50 lakh and the loan amount is below Rs. 35 lakh.

This particular provision came into effect from the financial year 2020-21 onwards. It is important to note that these tax benefits are only applicable to the individual in whose name the house and loan are registered. In the event of the individual's demise, where the property and loan liabilities are inherited by someone else, the inheritor is not eligible to claim any tax benefits.

However, in cases where a joint loan is taken or the property is jointly owned by multiple individuals, each person involved in repaying the loan and having ownership rights can individually claim deductions. This is because Section 24 applies to each individual rather than each property, allowing for multiple deductions in such joint ownership scenarios.

To simplify the process, here are crucial aspects to keep in mind, to ensure a clear understanding of section 24 of the income tax act:

1) Net Annual Value Calculation:

When determining the taxable income, only the Net Annual Value of the house(s) is taken into account. This value is derived by deducting the municipal taxes paid on the property from the gross annual value.

For instance, if the annual rental income from a let-out house is Rs. 1.2 lakhs and the municipal taxes paid amount to Rs. 40,000, the Net Annual Value is Rs. 80,000, and the tax liability is based on this value.

2) Offsetting Losses:

If a house is vacant without generating any income but incurs municipal taxes, the resulting loss can be offset against income from other sources, such as salary or rent from another property, within the same fiscal year.

If the loss cannot be offset in the same year, it can be carried forward for up to 8 years to be set off against future income.

3) Vacancy Period Consideration:

In the case of the house(s) remaining unoccupied for a specific period during the financial year due to the absence of tenants, only the actual rent received needs to be considered, not the entire 12-month period.

For example, if a house generates Rs. 17,000 as monthly rent and remains vacant for 4 months, the gross value of the house will be Rs. 1,36,000 (Rs. 17,000 * 8). The tax payable on this income will be calculated after deducting municipal taxes and applying the standard deduction of 30%.

FAQs:

Q) What is section 24 under income tax?

Section 24 pertains to the deduction of interest paid on loans obtained from housing finance companies or banks for the purpose of constructing a house property. This deduction applies whether the house is constructed by the taxpayer themselves or purchased from a vendor or house construction company.

Q) Is it possible to claim an exemption under Section 24 of Income Tax if you buy a property in your wife's name with your own funds?

If you purchase a property in your wife's name using your own funds, claiming an exemption under Section 24 of the Income Tax Act may not be possible.

The income from the property will be assessed in the hands of the recorded owner, which in this case would be your wife. All deductions under Section 24 would be allowed to the recorded owner.

However, the income from the property, after deductions, will be added to your total income (the husband's) under the provisions of Section 64, unless the income of your wife is higher than yours. Unless you can demonstrate that the funds provided for the purchase were given to your wife as a loan and not a gift, the income would be attributed to you.

Q) What additional exemption is available under Section 80EE for eligible individuals?

Section 80EE provides eligible individuals with an extra exemption of Rs. 50,000 based on certain conditions.

Q) How is the standard deduction calculated for the net annual value?

Regardless of actual expenses like insurance, repairs, electricity, and water supply, a fixed standard deduction of 30% is applied to the net annual value.