Section 24 of the Income Tax Act

Making their own house to live in is a dream of all and many of us fulfill it as well. However, the price of the property is so high that hardly anyone can purchase a house without taking a loan. Home loans are available at easy EMIs from various banks and financial institutions and even our government gives plenty of advantages on it. One of these benefits is tax deduction from the income of house property. Section 24 of the Income Tax Act tells about such deductions.

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Section 24 of the Income Tax Act, 1961 considers the interest that one pays for property or home loans. This section is also known as ‘Deductions from income from house property’. In other words, section 24 allows an individual to claim exemptions on the home loan interest that one pays.

There are two components in any house loan – interest and principal. Both of these components of home loan are treated in a different manner while we calculated tax benefits. On one hand where section 80C covers the principal amount and the house must already be constructed and has to be the residential property.

On the other hand, section 24 deals with the taxation aspect of the home loan’s interest. The maximum tax deduction limit under this section is Rs.1, 50, 000 and one does not have to exactly live in the house for which tax benefits are claimed.

The income from the residential property is considered in the following situations:

  • If an individual is renting a house, then the rent of that house is considered as a part of his/her income.

  • If an individual has more than one houses, then the Net Annual Value of all the houses except the house wherein one is living in falls under the income of that person.

However, if one is living in a house and he/she has that house only, then the income from that property is considered NIL. In this way, any income that comes from rent and the annual value of all the additional houses are subject to tax after the deductions that are made under Income Tax's section 24.

Section 24 – Deductions

Income Tax Act section 24 has two types of deductions:

  • Standard Deductions: This income tax exemption is allowed to every taxpayer wherein 30% standard deduction of the Net Annual Value (calculated above) is applied. This deduction is applicable even when the actual expenses on the property are lower or higher. In this way, this deduction is not respective to the expenses that have actually incurred on the property such as on electricity, water supply, repairs, insurance, etc. However, for a house that is self-occupied by the owner the Annual Value is NIL, thus its standard deduction also becomes zero.

  • Deduction on Interest of Home Loan: The house owners are allowed to claim an income tax deduction of up to Rs.2 Lakhs (Rs.1, 50, 000, if one is filing the income tax returns for Financial Year (2013-14) on the interest of the home loan, if the owner and his/her family is living in that house only. In addition to this, if the house is vacant, then also it is eligible for the same treatment. However, if the house is rented out, the whole of the interest of the home loan is eligible to get an income tax deduction. If a house owner fails to meet any of the below-mentioned conditions for Rs.2 Lakhs tax rebate, then his/her income tax rebate on the home loan interest cannot be more than Rs.30, 000. Following are the conditions to claim Rs.2 Lakhs income tax deduction:

    • The home loan should be taken on or after April 1st, 1999.

    • The home loan should be taken for construction or purchase of a property.

    • The construction or purchase for which the loan is taken should be completed at least within five years from the financial year’s end in which the home loan was taken.

Note: In order to avail the deductions under section 24 of Income Tax, one should compute the amount of interest that he/she has to pay to the financial institution or bank from which the loan has been taken; separate from the principal amount repayment. It doesn’t matter whether one has actually made payments to the financer as he/she will get tax exemption on the whole yearly interest amount.

Section 24 – Exceptional Situations

There are some exceptional situations come under section 24:

  • If the house is not occupied by the owner, then the owner can claim the income tax exemptions for the entire interest amount that he/she is paying. This exemption does not have an upper limit.

  • If the house is not occupied by the owner due to his/her business or employment in some other town and he/she is living in some other rented property or another property in the city wherein the employment is, then he/she can claim tax rebate on the payment of interest but only up to Rs.2 Lakhs.

  • There is no income tax rebate provided for the brokerage or commission that one has to pay to arrange tenant or loan.

  • The house owner must have a certificate of interest in the house loan that he/she has taken.

  • An individual should purchase or finish construction of the home within three years of taking the home loan to claim the maximum income tax deduction on the interest amount of loan. However, if the purchase or construction is not finished within three years, then one can claim the deduction of up to Rs.30, 000 in place of Rs.2 Lakhs.

Section 24 – Conditions to Claim Income Tax Deduction on the Interest of Home Loan

An individual has to meet the below three conditions for claiming the income tax deductions:

  • The loan should be taken on or after 01st of April 1999 for construction or purchase of the house.

  • One should have interest certificate for the interest that is payable on the loan is taken.

  • The house should be constructed or acquired within five years (three years till the Financial Year 2015-16) from the end date of the financial year during which the loan has been taken.

The deduction on interest can be limited to Rs.30, 000 if any of the below-mentioned conditions are met:

  • The loan is taken after or on 01st April’1999 for renovation, reconstruction, or repairs of the home property.

  • The loan is taken before 01st April’1999 for the construction, purchase, reconstruction, or repairs of the home property.

How to Compute Income from House Property?

Computing the income from house property is not very easy, but here are a few points that one should keep in mind while calculating it:

  • It is only the ‘Net Annual Value (NAV)’ of the house that is considered for income tax. The NAV is calculated by deducting the municipal taxes that are paid for the property from its gross annual value. To understand this, let us take an example, if the annual rent that one earns from his/her rented house is Rs.1, 50, 000, and the municipal tax that he/she is paying is Rs.50, 000. In this case, the Net Annual Value of the house is Rs.1, 00, 000 and the house owner has to pay taxes on NAV only.

  • If a house is vacant for a specific duration during a financial year because of the unavailability of the tenants, then the rent for the house is computed only for the period during which the house got its tenants. Suppose, a house was lying vacant for five months and after that, it was rented for Rs.16, 000 for the rest of the seven months of that financial year. In this case, the gross value of that house is calculated for seven months only and it will be Rs.1, 12, 000 (Rs.16, 000 * 7). The tax that is paid on this income will be calculated after deduction of municipal tax and 30% standard deduction.

  • If the house is not giving any income to its owner and lying vacant, but the owner is paying the municipal taxes, then he/she can offset the loss of income from various other means – like rent from other property or salary during the same financial year. However, if an individual is unable to offset these losses in the same financial year, then he/she can carry forward this loss for up to eight years.

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