Section 24 of the Income Tax Act

Section 24 of the Income Tax Act provides for the provisions related to the deduction of interest on housing loans. This section outlines the eligibility criteria and the conditions under which you can claim deductions on the interest paid on loans taken for the acquisition or construction of a property. Understanding Section 24 is essential for you to optimize your tax liabilities and plan your home loan financing.

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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. 

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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.

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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:

Particulars Self –Occupied Property Let–Out Property
Gross Annual Value NIL Rs. 1,20,000
Minus (-): Municipal Taxes NA Rs. 4,000
Net Annual Value (NAV) NIL Rs. 1,16,000
Minus (-):  Standard Deduction (i.e. 30% of NAV) NA Rs. 34,800
Minus (-): Interest on Housing Loan Rs. 3,00,000 Rs. 3,00,000
Minus (-):  Pre-construction Interest Rs. 60,000 Rs. 60,000
Income from House Property Rs. 3,60,000 Rs. 2,78,800
Overall Loss is Restricted to Rs. 2 lakhs Rs. 2 lakhs

Applicability of Deductions under Section 24 of the Income Tax Act

Applicability of Deductions under Section 24 Deductions Available under Section 24
Rented property which is bought with own funds 30% standard deduction on NAV
Self-occupied property bought with housing loan Rs. 2,00,000 on home loan interest paid in a financial year
Rented property which is bought with a housing loan Entire home loan interest

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.

FAQs

  • What is the maximum limit of deduction under Section 24?

    The maximum limit of deduction under Section 24 is Rs. 2 lakhs.
  • Can I claim both Section 24 and 80EE?

    Yes, you can claim both Section 24 and Section 80EE deductions on your home loan interest in a single year, but with some conditions:
    • Section 24:

      • Allows deduction of up to Rs. 2 lakhs on the interest paid on a home loan for a self-occupied property.

      • The entire interest is deductible if the property is let out.

      • There are other conditions depending on whether the property is under construction or completed.

    • Section 80EE:

      • Provides an additional deduction of Rs. 50,000 on home loan interest for first-time home buyers.

      • Applies only to loans sanctioned between April 1, 2016, and March 31, 2017.

      • Must be claimed after exhausting the limit under Section 24.

  • What is Section 24 in the new tax regime?

    Section 24 in the new tax regime still deals with deductions related to income from house property, but its scope is significantly narrower compared to the old regime.
    • Deductions allowed under Section 24 in the new tax regime:

      • Interest on housing loan for rented-out property

      • Standard deduction of 30% on rental income

    • Deductions NOT allowed under Section 24 in the new tax regime but are available with the old tax regime:

      • Interest on housing loan for self-occupied property

      • Municipal taxes

      • Maintenance charges

      • Vacancy allowance

  • What is the 24B deduction?

    Section 24B allows you to claim a deduction of up to Rs. 2 lakhs for the interest paid on a loan taken for any of the following purposes:
    • Acquisition of a new residential house property

    • Construction of a residential house property

    • Repair or reconstruction of an existing residential house property

  • Is Section 24 applicable for under-construction property?

    No, Section 24 is not directly applicable for under-construction properties in terms of claiming deductions for interest paid on a housing loan during the construction phase. However, once the construction is complete and you get possession, you can claim deductions on interest paid during both the construction phase and the post-construction phase under Section 24(B).
  • Where is Section 24 in the ITR form?

    While Section 24 is not explicitly mentioned by name in the ITR form, the deductions it allows are incorporated within the "Income from House Property" section.

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