Section 24 of the Income Tax Act

In the article below, we shall learn more about Section 24 of the Income Tax Act.

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 is also known as 'Deductions from income from house property.' In other words, section 24 of the Income Tax Act 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 loans are treated differently when we calculate tax benefits.

On the one hand, where section 80C covers the principal amount, the house must already be constructed and has to be a 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. 2,00,000, and one does not necessarily have to live in the house to claim tax benefits.

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 a part of their income.

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

• However, if one is living in a house and they have 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 made under section 24.

Thus, Section 24 of the Income Tax Act focuses on tax on rental income from the property under income from house property. Its sub-sections – Section 24A and Section 24B of the Income Tax Act, talk about deductions they can claim in two different scenarios.

Deductions under Section 24

Section 24 of the Income Tax Act has two types of deductions:

1. The Standard Deduction under Section 24A: 

   The standard deduction under section 24a from income from house property is the income tax exemption allowed to every taxpayer. It is a 30% standard deduction of the Net Annual Value of the rented property. This deduction under section 24 is applicable even when the actual expenses on the property are lower or higher. In this way, this deduction is irrespective of the expenses incurred on the property, such as 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.

   For example, Mahesh bought a house and gave it on rent. The annual rent of the said house is Rs 1,00,000. In such a case, he can claim a tax deduction of Rs 30,000 under section 24 of the Income Tax Act. However, if he is occupying the said property, this standard deduction under section 24a from income from house property is not applicable. In such scenarios, Section 24B of the Income Tax Act will give a window to claim a deduction for self-occupied properties, provided a housing loan is involved. Let us look at this in detail below.

2. Section 24B of the Income Tax Act- Deduction on Interest of Home Loan: 

   The house owners are allowed to claim an income tax deduction under section 24 of up to Rs.2 Lakhs on the home loan's interest if the owner and their family are 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 on 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 the Rs. 2 Lakhs tax rebate, then their income tax rebate on the home loan interest cannot be more than Rs.30,000. The following are the conditions to claim Rs.2 Lakhs income tax deduction under section 24:

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

   • A home loan should be taken for the 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 of which the home loan was taken.

   • The assessee must submit a certificate from the person to whom the interest is payable on the borrowed capital. This certificate should mention the amount of interest payable.

   Note: To avail of the deductions under section 24 of Income Tax, one should compute the amount of interest they have to pay to the financial institution or bank from which the loan has been taken, separate from the principal repayment amount. It does not matter whether one has actually made payments to the financer, as they will get tax exemption on the whole yearly interest amount.

Exceptional Situations under Section 24 of the Income Tax Act

There are some exceptional situations that come under section 24 of the Income Tax Act:

• If the owner does not occupy the house, then the owner can claim the income tax exemptions for the entire interest amount that they are paying. This exemption does not have an upper limit.

• If the owner does not occupy the house due to their business or employment in some other town and they are living in some other rented property or another property in the city wherein the employment is, then they can claim a tax rebate on the payment of interest but only up to Rs.2 Lakhs.

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

• The house owner must have a certificate of interest in the house loan that they have taken.

• An individual should purchase or finish construction of the home within five years of taking the home loan to claim the maximum income tax deduction on the interest amount of the loan. However, if the purchase or construction is not finished within five years, then one can claim a deduction under section 24 of up to Rs.30,000 in place of Rs.2 Lakhs.

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

An individual has to meet the below three conditions for claiming the income tax deductions under section 24:

• The loan should be taken on or after April 1st, 1999, for the construction or purchase of the house.

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

• The house should be constructed or acquired within five years from the end date of the financial year during which the loan has been taken.

The deduction under section 24 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 April 1st, 1999, for renovation, reconstruction, or repairs of the home property.

• The loan is taken before April 1st, 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 one earns from their rented house is Rs.1,50,000, and the municipal tax 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. For example, 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 the deduction of municipal tax and the 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 they 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 they can carry forward this loss for up to eight years.

Applicability of Deductions under Section 24

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