Section 24 of Income Tax Act

Section 24 of Income Tax Act

Section 24 of the Income Tax Act 1961 offers substantial tax benefits for homeowners by allowing deductions on income generated from house property. Given that purchasing a home is a significant milestone for many middle-class Indians, home loan EMIs often become a major financial commitment. Recognising this, the government has introduced provisions under Section 24 to ease this burden through tax exemptions, specifically on interest repayments. These benefits not only make homeownership more affordable but also support individuals with rental properties by enabling them to reduce taxable income. This article provides detailed information on Section 24 of Income Tax Act, its deductions, exceptions and more.

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What is Section 24 of Income Tax Act?

Section 24 of the Income Tax Act 1961, known as “Deduction from Income from House Property,” allows homeowners to claim tax deductions on interest payments for home loans. This provision is especially beneficial for those with home loan commitments, helping them reduce taxable income and manage their finances more efficiently.

For self-occupied properties, homeowners can claim a maximum deduction of up to ₹2 lakh per fiscal year on the interest paid towards their home loan. If the property is rented out, the deduction covers the entire interest amount paid, making it particularly advantageous for rental property owners.

Section 24 consists of two main parts:

• Section 24(a) allows a standard deduction for rental income from house property.
• Section 24(b) provides a deduction on annual income for interest repayment on a home loan taken for purchasing or constructing a house property.

It’s important to note that these deductions apply only to individuals with income from house property; taxpayers without such income cannot utilise these benefits.

What does “Income from House Property” mean?

Under the Income-tax Act 1961, “Income from House Property” refers to any income generated from owning a property subject to taxation. This income can be classified into two main types:

• Rental Income: Any income generated by renting out a property is taxable under the head “Income from House Property.” This includes both residential and commercial properties leased out to tenants.
• Deemed to be Let-Out Property: If an individual owns more than one property that is not self-occupied, the tax law requires them to treat one of these properties as “self-occupied” (and thus not taxable) while the others are considered as “deemed let out.” The annual value of these “deemed let-out” properties is calculated based on fair rental value and added to the owner’s income for tax purposes.

Deductions Under Section 24 of Income Tax Act

Section 24 of the Income Tax Act 1961 provides valuable deductions for individuals earning income from house property. These deductions help reduce taxable income and relieve property maintenance and loan repayments. Here are the key deductions allowed under Section 24:

Standard Deduction [Section 24(a)]

• 30% Standard Deduction: Section 24(a) allows a standard deduction of 30% on the net annual value of a property. This deduction applies to let-out properties to cover maintenance expenses, regardless of the actual amount spent. However, this deduction is not available for self-occupied properties.
• Purpose: This standard deduction provides tax relief on general property upkeep and maintenance charges that may arise during the year.

Interest on Borrowed Capital [Section 24(b)]

• Tax Benefit on Home Loan Interest: Under Section 24(b), a tax deduction of up to ₹2 lakh per year is allowed for interest paid on a home loan. This deduction applies if the loan was taken for the purchase, construction, or renovation of a property.
• Maximum Deduction Limit: The maximum allowable deduction is ₹2 lakh for self-occupied properties if the loan was taken for purchase or construction completed within five years from the end of the financial year in which the loan was taken. For let-out properties, there is no maximum deduction limit.
• Eligibility for Deduction: This deduction applies only if the loan is used for constructing, purchasing, or renovating a property and not for brokerage or commission costs paid to intermediaries.

Pre-Construction Interest

• Deduction on Pre-Construction Interest: When a loan is taken for the construction or purchase of a property, the interest paid during the pre-construction phase can be claimed as a deduction. However, this does not apply to loans taken for repairs or reconstruction.
• Claiming Pre-Construction Interest: The total pre-construction interest is deductible in five equal instalments starting from the year the property is acquired or the construction is completed. The total deduction, including pre-construction interest, is capped at ₹2 lakh for self-occupied properties.

Exceptions under Section 24 of Income Tax Act

Section 24 allows deductions for income from house property, but there are exceptions:

1. Non-Deductible Expenses: Brokerage fees for arranging tenants and additional charges related to the loan, like service fees, cannot be claimed as deductions.
2. Self-Occupied Property Exception: If you live in a rented house in a different city for work, you can still claim a deduction of up to ₹2 lakh on home loan interest, even if the property is considered self-occupied.

Conditions to Claim Deductions under House Property Income

To claim the deduction under Section 24(b) for home loan interest, you must meet these three conditions:

1. The loan must be taken after 1st April 1999 for the purchase or construction of the property.
2. The acquisition or construction of the property must be completed within 5 years from the end of the financial year in which the loan was taken.
3. You must have an interest certificate showing the interest payable on the loan.

Keep in mind that your interest deduction may be limited to ₹30,000 if any of these conditions apply:

• The loan was taken before 1st April 1999 for the purchase, construction, repairs, or reconstruction of the property.
• The loan was taken on or after 1st April 1999 for repairs or reconstruction of the property.
• The acquisition or construction is not completed within 5 years from the end of the financial year in which the loan was taken.

Computation of Section 24 of Income Tax Act Deductions

Let’s consider a different example to explain the calculation:

Meena takes a home loan of Rs. 5 lakh to purchase a house. She pays an annual interest of Rs. 1.8 lakh. The construction was completed within 3 years, and she has been paying Rs. 1.5 lakh in interest during the construction phase. Meena rents the house and earns a monthly rental income of Rs. 25,000. Additionally, she pays Rs. 12,000 in municipal taxes for the property.

1. Gross Annual Value (GAV):

• Rental Property: Meena earns Rs. 25,000 per month, so her rental income for the year is Rs. 25,000 * 12 = Rs. 3,00,000.

2. Net Annual Value (NAV):

• Rental Property: NAV is calculated as GAV minus municipal taxes. Therefore, NAV = Rs. 3,00,000 – Rs. 12,000 = Rs. 2,88,000.

3. Deductions Under Section 24:

• Standard Deduction: This is 30% of NAV.
  • 30% of Rs. 2,88,000 = Rs. 86,400.
• Interest on Borrowed Capital:
  • Meena paid Rs. 1.8 lakh in interest on her home loan. This can be claimed under Section 24(b).
• Pre-construction Interest:
  • During the construction phase, she paid Rs. 1.5 lakh in interest, which is spread across 5 years. Thus, for the current year, she can claim Rs. 30,000.

4. Final Calculation:

Income from House Property = (Net Annual Value – Standard Deduction) – (Interest on Borrowed Capital + Pre-construction Interest)

• NAV = Rs. 2,88,000
• Standard Deduction = Rs. 86,400
• Interest on Borrowed Capital = Rs. 1,80,000
• Pre-construction Interest = Rs. 30,000

Income from House Property = (Rs. 2,88,000 – Rs. 86,400) – (Rs. 1,80,000 + Rs. 30,000)
Income from House Property = Rs. 2,01,600 – Rs. 2,10,000
Income from House Property = Loss of Rs. 8,400

In this example, Meena ends up with a loss from her house property of Rs. 8,400, which can be set off against other income sources.

House Property Income Deductions other than Section 24

In addition to the deductions under Section 24 for home loan interest, taxpayers can also claim benefits under Section 80EEA for interest repayment on home loans. Here’s how you can avail these benefits and the conditions you need to meet:

• Maximum Deduction: You can claim an additional deduction of up to ₹150,000 annually under Section 80EEA on the interest paid for home loans.
• Eligibility Criteria for Section 80EEA:
  • First Home: The property must be your first home to qualify for the interest deduction under this section.
  • Property Value: The cost of the property should not exceed ₹45 lakh to be considered for affordable housing.
  • Loan Sanctioned Date: The home loan must be sanctioned between 1st April 2019 and 31st March 2022.
  • Interest Deduction: The tax rebate applies only to the interest accrued on the home loan, not the principal repayment.
• Combined Benefits: If you qualify for both Section 24 and Section 80EEA, you can claim a total of ₹3.5 lakh in deductions (₹2 lakh under Section 24 and ₹1.5 lakh under Section 80EEA).

Conclusion

In conclusion, Section 24 of the Income Tax Act offers significant tax relief for homeowners by providing deductions on income generated from house property, primarily through interest payments on home loans. This provision not only helps reduce the financial burden on self-occupied property owners by allowing a deduction of up to ₹2 lakh on home loan interest but also offers more flexibility for rental property owners with a deduction on the full interest paid. Additionally, Section 80EEA further enhances the benefits for first-time homebuyers by providing an extra deduction on home loan interest, making homeownership more affordable.

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