Section 24 of the Income Tax Act

Section 24 of the Income Tax Act

Section 24 of the Income Tax Act of 1961 considers the interest that one pays for property or home loans. This section falls under the head 'Deductions from income from house property' of the Income Tax Act. In other words, Section 24 of the Income Tax Act allows you to claim exemptions on your home loan interest payments.

There are two components to any house loan –

• Interest

• Principal

Both of these components of home loans are treated differently when we calculate tax benefits.

Tax Benefits under Section 80C: 

On one hand, where Section 80C covers the principal amount, the house must have already been constructed and has to be a residential property.

On the other hand, Section 24 deals with the taxation on interest payment of home loans. The maximum tax deduction limit under this Section is Rs. 2 lakhs.

The following income from property is liable to taxation under Section 24 of the Income Tax Act, 1961:

• Rental income by letting out a property

• If you own multiple houses, the Net Annual Value of all houses (except the one they reside in) is included

• If you live in a house you own and have only that one property, the income from that property is not considered

Important Updates in BUDGET 2023 on Section 24 under Old Vs. New Tax Regime

Tax benefits on home loans in FY 2023-24 (AY 2024-25):

1. Old Tax Regime:

   • Interest: Deduction up to Rs. 2 lakhs on interest paid for both self-occupied and rented properties.

   • Principal: Deduction up to Rs. 1.5 lakhs under Section 80C. This can include stamp duty and registration charges.

2. New Tax Regime:

   • Interest: No deduction for self-occupied properties. For rented properties, same as the old regime (Rs. 2 lakhs).

   • Principal: No Deduction under Section 80C.

NOTE: ONLY under OLD TAX REGIME, first-time homebuyers with loan amount ≤ Rs. 35 lakhs and property value ≤ Rs. 50 lakhs can claim an extra Rs. 50,000 deduction on interest under Section 80EE.

Types of Deductions under Section 24 on House Property

There are three main types of deductions you can claim under Section 24 of the Income Tax Act for your house property:

1. Municipal Taxes:

   • Paid to the local municipal corporation.

   • Deductible from the gross annual value of the property to get the net annual value.

   • Only the amount actually paid by the owner during the year is allowed.

2. Standard Deduction:

   • A flat 30% of the net annual value.

   • Applicable to both self-occupied and let-out properties.

   • No need to submit actual expense proofs.

3. Interest on Loan:

   • Section 24(b)(i): Interest on Loan for Self-Occupied Property 

   • Section 24(b)(ii): Interest on Loan for Let-out or Deemed Let-out Property

   • Different limits for each:

     • Self-Occupied: Up to Rs. 2 lakhs for one property or Rs. 30,000 for repairs/renewal.

     • Let-Out: No limit; the entire interest amount can be deducted.

NOTE: A loan must be taken from a financial institution for the purchase, construction, repair, or renewal of the property. 

Deduction on Interest from Home Loan for pre-construction 

You cannot claim tax deductions on interest paid while the house is still being built. However, you can claim them later under the Income Tax Act by spreading out this "pre-construction interest" over 5 equal instalments, starting from the year your house is completed.

The details of tax benefits on interest paid for home loans in pre-construction homes are listed below:  

• Deductible Interest: You can deduct the interest paid on your home loan from your taxable income during the construction phase. This can significantly reduce your tax liability.

• Construction Period: The deduction is applicable for the entire construction period, starting from the first payment made towards the loan till the date of possession.

• Deduction Limit: The maximum deductible interest in a financial year is Rs. 2 lakhs. This limit applies to both pre-construction and under-construction properties.

• Documents Required: To claim the deduction, you will need to provide proof of interest payment and construction progress from the builder.

• Additional Deductions: You can also claim a deduction on construction costs up to Rs. 1.5 lakhs under Section 80C of the Income Tax Act.

Conditions to Claim Deductions on House Loan under Section 24

To deduct your home loan interest, you need to fulfil these conditions:

• Loan after 1999: Borrowed after April 1, 1999, for buying or building your home.

• 5-year Construction Window: Construction or purchase completed within 5 years of taking the loan.

• Interest Certificate: Get an official document detailing the interest paid on your loan.

• Self-occupied property: The house must be for your own stay, not rented out.

• Interest Rate: No upper limit on the interest rate, but the claim is limited to the actual interest paid or the market rate (whichever is lower).

• Repayment Period: The loan term cannot exceed 15 years.

• Construction Completion: The claim starts in the year the house construction is completed, and you receive an occupancy certificate.

• Pre-Construction Interest: Interest paid before construction gets spread over 5 years, starting from the completion year.

NOTE: You do not necessarily have to live in the house to claim tax benefits under Section 24.

BONUS NOTE: If your loan falls outside these conditions, your deduction might be limited to Rs. 30,000.

Computing Income from House Property

Let us understand the key aspects of the computation of income from house property from below:

1. Calculation of Income from House Property:

   • Consider only the 'Net Annual Value (NAV)' for income tax.

   • NAV is calculated by subtracting municipal taxes from the gross annual value of the property.

   • Taxes are payable on NAV only.

   Example: If annual rent is Rs. 1.5 lakhs and municipal taxes are Rs. 50,000, then NAV is Rs. 1 lakh.

2. Vacant Period Impact:

   • If the house is vacant for part of the financial year, compute rent only for the occupied period.

   Example: If your house is vacant for 5 months, and you rent it out for Rs. 16,000 for the remaining 7 months. The Gross Value will be calculated for 7 months only (Rs. 16,000 * 7)

3. Loss Offset:

   • If the house is vacant, but municipal taxes are paid, the owner can offset the loss.

   • The offset can be from rent of another property or salary in the same financial year.

   • Un-offset losses can be carried forward for up to eight years.

Illustration of Computing Income under House Property

Let us understand the computation of income from house property from the following example:

• Annual housing loan repayment: Rs. 6 lakhs

  • Interest component: Rs. 3 lakhs

• Pre-construction interest: R.s 3 lakhs

• Monthly rental income: Rs. 10,000

• Municipal taxes paid: Rs. 4,000

Now, let us calculate the income from the house property:

Applicability of Deductions under Section 24 of the Income Tax Act

Summing It Up

Section 24 of the Income Tax Act plays a pivotal role in determining your taxable income by addressing the aspects of income from house property. The section outlines the permissible deductions and exemptions related to such income, contributing to the overall framework of income taxation. You must comprehend the provisions of Section 24 to ensure compliance with tax regulations and optimize your tax liability within the legal parameters.