Section 24 of the Income Tax Act deals with interest that an individual pays on home or property loans. The government recognizes that housing is one of the most important needs therefore, they have come up with several key benefits under section 24(B) of the Income Tax Act, 1961 to grant relief by way of various tax breaks to reduce your tax outgo. The deductions available are interest on loan and standard deduction.
Income from House Property
There are three possible scenarios wherein income from house property can occur:
- Income by way of rent on a let out property
- The annual value of the property which is considered “deemed to be let out” for income tax purposes (When we own more than one property);
- The annual value of the property which is self-occupied;
Income from House Property shall be taxable only under the following conditions:
- The assessee must be the owner of the property.
- The property should be used for any purpose other than for carrying out Business or Profession. If the property is used for own business or profession, then the income from the same shall be taxed under the head ‘Income from Business and Profession’.
- Income from House Property will be taxable under 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.
Section 24 of Income Tax Act – Deductions under House Property
There are 2 types of tax deductions under Section 24 of the Income Tax Act to reduce your tax outgo if you have income from house property:
- Standard Deduction is 30% applicable on the Net Annual Value of the property.
- This 30% deduction is allowed even when your actual expenditure on the property is higher or lower.
- Therefore, this deduction is irrespective of the actual expenditure 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
If the taxpayer has borrowed a housing loan to purchase or to construct a house property, then EMI consists of 2 parts namely Interest & principal. Deduction of interest part can be claimed from the income of house property whereas deduction of the principal amount in case of residential house property can be claimed under Section 80C.
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 you have rented out the property, the entire interest on the home loan is allowed as a deduction. However, there are certain criteria mentioned below that you must meet else the deduction on interest will be limited to INR 30,000:-
- The home loan must be for the purchase and construction of a property;
- The loan must be taken on or after 1st April 1999;
- The purchase or construction must be 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 Rs 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.
For example: If the construction of a house gets completed on 15th October 2019 (FY 2019-20), then we are eligible to claim deduction accruing to 1/5th of the interest paid till 31st March 2019 while filing our tax returns for the FY 2019-20.
How to determine Income from House Property?
Let’s understand the calculations with the help of an example:
Ansh 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. The person 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:-
- He has a self-occupied property, or
- The property is rented out
|Type of Property||Self Occupied||Let Out|
|Gross annual Value (Rent paid- 7000*12)||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)|
|Overall loss restricted to||(200,000)**||(2,37,500)*|
*Maximum loss set-off allowed in a financial year is limited to Rs 2 lakh. The remaining loss from a can be carried forward to future years 8 years in total. However, in these 8 years, it can only be set off from house property income.
** In the case of self-occupied property, the deduction for interest on Home Loan is restricted to the maximum 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”. Such 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.
Section 24 of the income tax act calculates the tax exemptions on the basis of property income, on the following basis:
– If a person rents his or her property, then the rent will be considered as part of his earned income.
– Secondly, if a person owns more than one house, then the net value asset of the house is considered as part of the income. However, the house one is living in is not counted under this.
– If a person owns only a single house, then the net value asset of the house is considered Nil.