India has been witnessing continuous and rapid growth during recent decades. It is the vision of the country to be a developed nation by 100rd year of Independence. Affordable housing for all is one of the vital factor in the development process of the country. The government recognizes this needs and therefore they have come up with several key benefits to grant relief by way of tax breaks under section 24 of Income Tax Act.
Income from House Property
The annual value of any property comprising of building or land thereto of which a person is the owner is chargeable to tax under the head “Income from House Property“. There are three possible scenarios wherein income from house property can occur:
- Income from Let out House Property
- Income from Deemed Let Out House Property ( When the assesses owns more than two property)
- Self- occupied Property Value
Income from House Property shall be taxable under the following conditions:
- The assessee must be the owner of the property.
- The property should not be used for the purpose of Business and Profession. If the property is used for own business or profession then the same will be taxed under the head “Income from Business or Profession”
- Income from House Property will be taxable in the hands of the legal owner of the property. The owner for this purpose means a person who can exercise the rights of the owner on his own and not on someone else’s behalf.
Deductions under House Property
There are 2 types of tax deductions under Section 24 of the Income Tax Act:
- Standard Deduction is 30% applicable on the Net Annual Value of the property.
- Therefore, this deduction is irrespective of the actual expenditure that you may have incurred on insurance, repairs, electricity, water supply, etc.
- For a self-occupied house property, since the Annual Value is Nil, the standard deduction is also zero on such a property.
Interest on Home Loan
Interest payable on loans borrowed for the purpose of acquisition, construction, repairs, renewal or reconstruction can be claimed as deduction. Whereas Section 80C benefit is applicable for the principle amount of the loan in case of residential house property.
If the owner or his family are self-occupying the house property, they can claim up to INR 2 lakh on the interest of their home loan. The same treatment applies when the house is vacant. However, if the house property is let out for rent, the entire interest amount is allowed as deduction.
However, the limit of deduction will be INR 30,000 in case the following criteria do not match:
- The home loan must be for the purchase and construction of a property.
- The loan is taken on or after 1st April 1999.
- The purchase or construction is completed within 5 years from the end of the financial year in which the loan was taken.
- There is an interest certificate available for the interest payable on the loan.
Pre Construction Interest
The interest paid on a housing loan when the house property is under construction is known as “Pre-construction Interest”. There is also a benefit of pre-construction interest that arises when you take a home loan for purchasing or construction.
Key points to remember before claiming this interest:-
- This cannot be claimed for a loan taken for repairs or reconstruction of the house;
- The amount of pre-construction, as well as interest on a housing loan that can be claimed for a particular year, cannot exceed INR 2 lakhs in any case.
- The deduction of such pre-construction interest is allowed in 5 equal installments starting from the year when construction completes.
Lets understand this with the help of an example:
Ms. Hawa has taken a loan of INR 5,00,000 for construction of property on 1.10.2020. Interest is payable @10% p.a. The construction was completed on 30.6.2021. In this case, the interest allowed as deduction under section 24 will be:
Pre-construction interest = 10% of INR 5,00,000 for 6 months (from 1.10.2020 to 31.03.2021) = INR 25,000
Pre-construction interest is allowed in 5 equal instalment of INR 5,000 from the completion of construction i.e. in this case P.Y. 2021-2022
Interest of the year (1.04.2021 to 31.03.2022) = 10% of INR 5,00,000 = INR 50,000
Therefore, total interest deduction = 50,000 + 5,000 = INR 55,000
How to determine Income from House Property?
Let’s understand the calculations with the help of an example:
Akash is repaying a home loan. The total amount paid in a particular year amounts to INR 6 lakhs of which INR 2.5 lakhs is the interest component. Akash has also incurred a pre-construction interest of INR 2 lakhs. He is earning INR 80000 annually from a let out property and also pays municipal taxes of INR 5000 for the property. Let us now calculate the Income from House Property under both the scenarios:
|Type of Property||Self Occupied||Let Out|
|Gross annual Value (Rent paid)||NIL||80,000|
|Less: Municipal Taxes or Taxes paid to local authorities||NA||5,000|
|Net Annual Value (NAV)||NIL||75,000|
|Less: Standard Deduction(30% of NAV)||NA||22,500|
|Less: Interest on Housing Loan||2,50,000||2,50,000|
|Less: Pre-construction interest (1/5th of 2 Lakhs)||40,000||40,000|
|House property Income||(2,90,000)||(2,37,500)|
In the case of self-occupied property, the deduction for interest on Home Loan have a maximum limit of INR 2,00,000. Whereas in the case of a let-out property, you can claim the entire amount of interest as a deduction.
Rental income in the hands of the owner is charged to tax under the head “Income from house property”. Sub-letting income is taxable under the head “Income from other sources” or profits and gains from business or profession, as the case may be.
Yes, if the loan is taken for purchase, construction, repair, renewal, or reconstruction of the house. However, if the loan is taken for personal or other purposes then the interest on such loan cannot be claimed as a deduction.
Interest payable on a fresh loan taken to repay the original loan raised for the purpose of acquisition, construction, repairs, renewal or reconstruction of a House property is also admissible as a deduction.
Yes, deduction u/s 24(b) for interest is allowed on accrual basis i.e. interest accrued but not yet paid during the financial year can also be claimed as deduction.