Section 24 of Income Tax Act – Tax Benefit on Home Loans

To encourage its 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. So, if you have taken a home loan, you can claim tax exemptions and save money on your taxes in the process.

Section 24 of the Income Tax Act, 1961 allows homeowners to claim yearly tax exemptions against the interest paid on their home loans. Let’s find out about tax deductions, exceptions, and rebate calculations in detail. 

Section 24 of the Income Tax Act – A Brief Introduction 

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: 

1. If an individual is renting out a house, the rent is a part of their taxable income. 
2. For individuals owning multiple houses, the Net Annual Value includes the income of all the houses except the one they live in. 
3. 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. 

What sort of Tax Deductions can I get under Section 24?

When calculating the taxable income under Section 24, you can avail 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 24(a) 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 a deduction under Section 24 (b) 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 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) 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.

Also Read: How To Get Tax Deductions For Medical & Health Insurance Under Section 80D?

What are the Exceptions under Section 24 of the Income Tax Act?

There are certain exceptions to the provisions of Section 24. 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 he/she does 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. 

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, which is considered higher than the fair rent or municipal valuation of the property. 

Also Read: Taxation In Mutual Funds

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:

1. The deduction limit for pre-construction interest is fixed at Rs. 2,00,000.
2. If you avail of a loan for the purpose of house renovation or repair, then this deduction is not applicable.
3. 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 is over, Siddharth can claim a deduction of Rs. 6,00,000 in 5 equal instalments. Meaning, 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, 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:

1. The IT Act considers only the NAV of a property to calculate income tax.
2. 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.
3. 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.

Final Word

Section 24 of the Income Tax Act offers tax benefits for the interest component of home loans, making it profitable to invest in properties. With many benefits available to reduce property taxes and loan burden, many feel encouraged to get new loans and become homeowners. To further simplify the borrowing and repaying process, download the Navi app to apply for a home loan and enjoy quick and seamless approval. 

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