Deductions From House Property Income Under Section 24 Of The Income Tax Act
To encourage the citizens to own a home, the Government of India has introduced a host of home loan tax benefits under the Income Tax Act, 1961. Homeowners can claim tax exemptions on their home loan repayments under Section 80C, 24, 80EE, and 80EEA of the Income Tax Act, 1961. Section 24 of the Income Tax Act, 1961 allows homeowners to claim yearly tax exemptions against the interest paid on their home loans.
If you are planning to take a home loan, or have taken one, here’s everything you should know about Section 24 tax deductions, rebate calculations and when you cannot claim tax deductions under Section 24. Read on!
What is Section 24 of the Income Tax Act?
Section 24 lets homeowners claim yearly tax exemptions of up to Rs.2,00,000 on interest payments against home loans. It also allows homeowners to claim deductions from taxes paid for the income derived from their rented or leased property.
For every individual property, a certain ‘income from house property’ is considered and taxed accordingly. However, when one owns a single house and lives in it, the property is considered ‘self-occupied’, and the income generated from it is not taxed.
Note that income from residential property is applicable only in the following cases:
- If an individual is renting out a house, the rent is a part of their taxable income.
- For individuals owning multiple houses, the Net Annual Value includes the income of all the houses except the one they live in.
- Income that comes from rent and owning multiple houses (annual net value) is taxable under Section 24 of the Income Tax Act.
Note: Net Annual Value is essentially the rent a property owner could have earned in a year had he/she put it on rent.
Tax Deductions You Can get under Section 24
Under Section 24 of the Income Tax Act, you can avail of the following deductions:
Municipal taxes
Includes service taxes levied by local authorities for your house property. These are applicable for tax deductions provided homeowners pay them during the year they are charged.
Standard deductions
This tax exemption under Section 24A of the Income Tax Act is allowed for everyone. The standard deduction is 30% of the net annual value of a property and applies even when the actual expenses are lower or higher. Its calculation does not consider additional expenses incurred for electricity, repairs, insurance, water supply, etc. Note that no standard deduction applies for a self-occupied house. This is because the annual value of such a property is nil.
Deduction on home loan interest
Homeowners can claim Section 24B deductions of the Income Tax Act if they have taken a home loan to purchase, renovate, or construct a house. They can claim a maximum of Rs. 2 lakh of tax deductions on the interest component of their home loans.
You can claim tax under 24B deductions only for the given conditions:
- For a let-out property, you can get deductions on the interest on loans taken for the purpose of construction, reconstruction, repairs and acquisitions.
- In the case of a self-occupied residential house, you can enjoy deductions of up to Rs.2 lakh under Section 24 (b)of the Income Tax Act. This is applicable to the interest component of a loan taken for constructing or acquiring the property.
- You can avail of total tax deductions of Rs.30,000 for reconstruction, renewals or repairs of your self-occupied residential property.
- In addition, the deduction applies only for loans taken on or after April 1, 1999.
- The construction or purchase must be concluded within 5 years from whence the home loan was taken out.
You can claim the tax deductions under Section 24 regardless of which financial institution granting the home loan. All you have to do is calculate the interest component payable for the home loan annually and claim tax deductions.
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Eligibility Criteria for Tax Deductions Under Section 24 of the Income Tax Act
Here are the eligibility criteria for claiming deductions of up to Rs. 2,00,000 under Section 24:
- The loan amount should be taken on or after 1st April 1999.
- Individuals must borrow the loan for the purchase, construction, reconstruction or renovation of a house property.
- Taxpayers must complete the purchase or construction of such property within 5 years from the end of the FY in which he/she took the loan.
- Taxpayers must submit an interest certificate containing details like interest paid and timeline. One can easily get access to such certificates from banks and financial institutions that have provided the loan.
- For claiming deductions under Section 24 of the Income Tax Act, one must make sure that they are self-occupying this property or the property is vacant. If the property is rented then they can claim the entire interest amount as deductions.
Now, if taxpayers do not fulfil any of the above-mentioned criteria, then they can claim deductions of only up to Rs.30,000 under Section 24 of the Income Tax Act. Moreover, if they have taken a loan before 1st April 1999, then also the deduction amount is restricted to Rs.30,000.
How to Compute the Taxable Income from a House Property?
The taxable income for house property is calculated in the following manner:
Income from house property = Gross annual value – Municipal taxes – Standard deduction – Interest on borrowed capital.
One needs to keep in mind the following factors when calculating the taxable income.
- The annual value of a property is calculated as the sum one can reasonably expect from rents for a year. The expected rent needs to be higher than the municipal valuation or fair rent or the actual rent charged for the property.
- Any tax levied by local authorities for the property is then deducted from the above value. So, for example, if a landlord earns Rs. 200,000 from his/her rented property and has paid Rs. 50,000 as municipal tax, the NAV of their property will be Rs. 150,000.
- If a house is vacant due to a lack of tenants, the NAV from rent is calculated only for the portion of the year when the house had tenants.
- The deductions made to calculate taxable income will not include the actual amount of rent not realised from a tenant.
- Homeowners can claim deductions of up to Rs. 30,000 if they took loans before April 1, 1999, to purchase, construct, or repair their homes.
The income from house property is nil in case-
- The owner occupies the house for most of the year.
- The owner stays in a rented property for his livelihood instead of his self-owned property.
Taxable Income on House Property Based on Occupancy
The following table details what deductions are applicable based on occupancy.
| Occupancy | Gross Annual Value | Deduction for municipal taxes | Standard Deduction | Deduction for home loan interest |
| Single self-occupied house | N/A | N/A | N/A | Rs. 30,000 or Rs. 200,000 if applicable |
| House property unoccupied by owner due to their employment/business being in another place | N/A | N/A | N/A | Rs. 30,000 or Rs. 200,000 if applicable |
| Let-out property | Computed as per Section 23(1)* of the Income Tax Act | Based on actual payment | 30% of NAV | The entire amount of home loan interest is allowed as a deduction. |
| Multiple self-occupied properties | One property is allowed as self-occupied property. Rest are considered to be let-out for computation. |
| Self-occupied and let-out for the rest of the year | Treated just like a let-out property |
| Part of the property is let out, and the other self-occupied | Each part of the property can be considered separate and calculated accordingly |
*Section 23 (1) of the Income Tax Act states that –
A house property’s gross annual value will be considered the higher of the following:
- Rent received after deducting the unrealised rent. However, this must not include the loss of rent due to vacancy.
- Expected rent is considered higher than the fair rent or municipal valuation of the property.
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Tax Deduction for Pre-Construction Interest of a Property
Section 24 of the Income Tax Act also provides tax deductions on pre-construction interest for a property. Here are the applicable conditions for the same:
- The deduction limit for pre-construction interest is fixed at Rs.2,00,000.
- If you avail of a loan for the purpose of house renovation or repair, then this deduction is not applicable.
- The deduction is provided in five equal instalments for every financial year.
Let us understand this with an example,
Siddharth takes a loan for property construction. Suppose, during the pre-construction period, he pays an interest of Rs.6,00,000. After the construction, Siddharth can claim a deduction of Rs.6,00,000 in 5 equal instalments. Meaning, that every year, he can claim a tax deduction of Rs.1,20,000. He can claim the first instalment in the financial year in which the construction is complete.
Tax Deduction for Rented Out Properties
You can also obtain tax deductions from rented-out properties. In this case, there is no upper limit to the deduction amount. Meaning, that you can claim the entire interest amount that you pay towards your loan.
For Example,
Mr Singh takes a loan from a bank and pays Rs.36,000 as EMI. The total EMI that he pays in a year will be Rs.4,32,000. Now let’s say, out of the overall EMI amount, the principal component is Rs.1,68,000, and the interest component is Rs.2,64,000 for the current financial year. In addition, his pre-construction interest stands at Rs.1,00,000. He will be able to claim Rs.20,000 from this pre-construction interest every financial year.
Now, let us consider that he rents out his property at Rs.35,000 per month.
According to this example,
| Property’s gross annual value | Rs. 4,20,000 |
| Less: Municipal tax | Rs. 10,000 |
| Property’s net annual value | Rs. 4,10,000 |
| Less: Standard deduction (30%) | Rs. 1,23,000 |
| Less: Housing loan interest | Rs. 2,64,000 |
| Less: Interest on pre-construction | Rs. 20,000 |
| Income from the house property | Rs. 4,10,000 – Rs. 4,07,000 = Rs. 3,000 |
| Loss | Nil |
Here are a few points that you must keep in mind before claiming a tax deduction for rented-out properties:
- The Income Tax Act considers only the NAV of a property to calculate income tax.
- If a house is vacant for a specific period of time, then the rent for that particular house is calculated only for the period during which tenants occupied the house.
- If a house is vacant and does not produce any income for the owner, while the owner pays regular municipal tax, then he/she can cover such loss from other sources, such as salary or rent from other property. However, if the owner cannot meet such a loss during a financial year, he/she can carry it for the coming 8 years.
When You Cannot Claim Tax Deductions under Section 24?
There are certain exceptions to the provisions of Section 24 of the Income Tax Act. They are highlighted below:
- One cannot claim deductions for brokerage or commission fees involved in arranging a loan or buying a house.
- For non-self-occupied houses, no upper limit is prescribed for the tax exemption on the interest amount.
- A house owner cannot claim deductions if they do not have a certificate of interest for the home loan.
- An individual cannot claim a full tax exemption of Rs.2 lakh if he/she does not purchase or finish the construction of a house within five years of taking the loan. However, one can still claim the standard deduction of Rs.30,000 in this case.
- If a homeowner does not occupy a house as he/she resides in another town due to employment or business issues, he/she can claim deductions of only up to Rs.2 lakh.
- For example, say you own a house in Kolkata but live in a rented apartment in Mumbai for your job. You can claim tax rebates of up to Rs.2 lakh for the interest paid on your home loan even if you do not live in it.
Final Word
Section 24 of the Income Tax Act offers tax benefits for the interest component of home loans. So, if you’re planning to take a home loan, don’t forget to claim tax deductions. Talking about home loans, Navi offers home loans up to Rs.10 crore in a 100% paperless manner. Just download the Navi app to apply for a home loan and enjoy quick and seamless approval.
FAQs
Ans: You can claim deductions between Rs. 30,000 to Rs. 2,00,000 under Section 24 of ITA. The deductions are applicable only to the interest component of home loans.
Ans: Only homeowners can tax deductions under Section 24. For joint loans, both loan applicants can claim their share of tax deductions separately.
Ans: Yes. You can claim tax benefits on the principal amount repayment of your home loan under Section 80C of the Income Tax Act. A homeowner can claim up to Rs. 1,50,000 as a deduction in a financial year. Also, first-time homebuyers are entitled to claim additional Rs. 50,000 as a deduction on their home loan interest under Section 80EE.
Ans: Yes, you can claim tax exemptions under both these sections. As per Section 24, you can claim a tax deduction of up to Rs. 2,00,000 on home loan interest of a self-occupied property, and under Section 80EE, you can claim an additional tax deduction on the interest component of a home loan of up to Rs. 50,000. So, in total, you can obtain a tax deduction of Rs. 2,50,000 on your home loan’s interest component.
If you have purchased a property in your wife’s name by availing of a home loan, then you won’t be able to claim tax deduction under Section 24, even though you pay the monthly instalments. You can, however, ask your wife to transfer the ownership of the house through a gift deed.
Pre-construction interest is the interest that an individual has to pay while the house/property construction continues. Note that tax deduction on home loan interest cannot be claimed while the house undergoes construction. It can only be obtained once the construction is completed.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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