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One of the most prominent forms of investments amongst the taxpayers of our country is for building a house. A lot of investments and loans are a part of this process.Section 24 is one of the most important sections which allows you the interest as a deduction under the Income Tax Act,1961.Section 24 is called ‘ Deductions from Income from House Property. Let us take a look at this section in-depth and know the features. Section 24 is one of the most prominent sections which allows interest expenses as exemptions under the act. Also, in Section 80C you can claim tax benefits on the repayment of the principal amount. The repayment of your home loan has two components, viz. the principal amount and the interest. While the interest of the repayment cannot be claimed as a deduction under Section 80C of the Income Tax Act, the repayment of the principal amount certainly is.
What is Income From House Property?
The incomes which will be taxable under the head ‘Income from house property of the Income-tax Act, 1961 are as follows:
- Rental Income on a let out property
- Annual Value of a property which is ‘deemed’ to be let out for income tax purposes ( when you own more than two house properties)
- The yearly value of a self-occupied property is Nil.
The annual value of a self-occupied property is zero. It can also be negative if interest is paid on the loan. For let out property, the rent received in the financial year is the Gross Annual Value. For a deemed to be let out property, the rent of a similar place is the Gross Annual Value.
What is Pre-Construction Interest?
If you have taken a home loan for the purchase or reconstruction of a house property, you can claim the deduction on pre-construction interest. The total amount of deduction available for this interest in a financial year is Rs. 2 lakhs. The deduction is allowed in 5 equal instalments starting from the year in which the house was purchased or the construction is complete. This deduction cannot be availed if the home loan is for repairs and reconstruction.
Deductions Under House Property
1. Municipal TaxesMunicipal Taxes are the taxes that are paid to the municipal corporation of the area you are living in. For the Net Annual Value calculation, the amount of municipal tax which is paid by the owner in the financial year is allowed from the Gross Annual Value.
2. Standard DeductionA standard deduction is allowed to all taxpayers at the rate of 30% of the Net Annual Value. For a self-occupied property, the standard deduction is zero. This deduction is allowed even though your expenditure may be higher or lower.
3. Deduction of Interest on Home LoanFor self-occupied property a deduction of Rs. 2 lakhs is allowed if they reside at the property. For a rented out property, the entire interest on a home loan is allowed as a deduction.
The conditions for allowance of the interest are -
- The loan must be availed after 1st April 1999.
- The purchase or construction must be complete within 5 years from the end of the financial year in which the loan was taken.
If you do not fulfil these conditions, the deduction amount is restricted to Rs. 30,000.
Conditions for Claiming Interest on Home Loan
- The loan has to be taken after 1st April 199 for the purpose of purchase or construction
- The acquisition or construction must be complete within 5 years of the loan taken.
- Your interest deduction may be limited to Rs. 30,000 if any one of the conditions is met
- If the loan is borrowed before 1st April 1999.
- The loan is borrowed after 1st April 1999 for the purpose of the purchase, construction and repairs.
Exemptions Under Section 24
- If the house is not occupied by you, you can claim the whole interests without any upper limit.
- If the house is not occupied by you because you live in another city for employment purposes and you pay rent for this accommodation, then you can claim a tax deduction up to Rs. 2 lakhs only.
- No deductions are available for any brokerage paid for buying or renting the property.
- The interest certificate must be provided for the loan taken.
What Is Section 80EE?
This section of the Income-tax Act,1961, allows an additional deduction of Rs. 50,000 if the cost of the house is lower than Rs. 50 lakhs and the loan taken is less than Rs. 35 lakhs. The provision was made available from the financial year 2020-21. If a person dies, the loan liabilities are transferred to their heir, but the heir cannot avail of tax exemptions in place of the deceased person. However, if the loan is on a joint basis, then all the parties can claim tax benefits in such cases.
Computation of Income under House Property
Let us take an example to understand the computation of house property.
The property can either be self-occupied or rented out.
The given conditions are-
- The annual loan amount - Rs. 4 lakhs
- Annual interest component - Rs. 2 lakhs
- Pre-construction period interest - Rs. 3 lakhs
- Rent earned - Rs. 7000 per month
- Municipal taxes paid - Rs. 3000 per month
| Property | Self- occupied | Rented out |
|---|---|---|
| Gross annual value | NIL | 84,000 |
| Less: Municipal taxes paid | NA | 3,000 |
| Net annual value | NIL | 81,000 |
| Less: Standard deduction | NA | 24,300 |
| Less: Interest on housing loan | 2,00,000 | 2,00,000 |
| Less: Pre-construction period interest | 60,000 | 60,000 |
| Income from house property | (2,60,000) | (2,03,300) |
| Overall Loss | (2,00,000) | (2,00,000) |
The maximum loss is Rs. 2 lakhs the remaining loss can be carried forward to the future financial years maximum of 8 years.
In the above example, the gross annual value of SOP is NIL and the rented out property is (7000*12) = 84,000. The municipal taxes paid for rented out property can be claimed as deductions. The standard deduction for the rented out property is given at the rate of 30%. Interest on housing loans can be availed as a deduction for both situations. The preconstruction period interest is availed as a deduction for both the properties. The loss can be set off and carried forward.
Apart from the purpose of constructing a house, interest paid on the personal loan can also be used for a tax deduction if the purpose is genuinely for business investment or any other purchase of the asset.
If the amount is used for buying any asset other than property, it would be considered capital gain and any interest paid is eligible for a tax deduction. Contrary to property, business investment and purchase of assets do not have any upper cap on the tax deduction. For all the claims you are making, there should be authenticproof furnished in order to get a successful tax refund.
FAQS
1. What is self-occupied property?
The property which is owned by an individual and is used for residential purposes is called self-occupied property.
2. What is pre-construction interest?
This is allowed when you have taken a loan for the purchase or construction of a property. The deduction is allowed in 5 equal instalments starting from the year in which the house is purchased or the construction is completed.
3. For how many years can the loss be set off under the head ‘Income from House Property?
The maximum years for which the loss can be set off is 8 years.
4. What is the limit on pre-construction interest?
The total amount of interest should not exceed Rs. 2 lakhs in any financial year.