Owning a home can be considered as one of the most desirable wishes for most of us. But given the skyrocketing prices of houses in the metros and even in Tier-II cities, it has become increasingly difficult for people to afford it.
Therefore, the government has come up with several key benefits under section 24(B) of the Income Tax Act, 1961 to grant relief by way of various tax breaks for buying a house as a way of rewarding anyone who invests in real estate.
This article covers all the provisions under Sec 24( B) that help you lower your tax liability as a homeowner. Read on.
What is Income from House Property?
There are three possible scenarios wherein income from house property can occur:-
- Housing income by way of rent;
- The annual value of the property which is considered “deemed to be let out” for income tax purposes (This occurs when we own more than one property);
- The annual value of the property which is self-occupied;
The Gross Annual Value differs in all the three cases as shown below:-
|Situation||Gross Annual Value (GAV)|
|Property let out for rent||Rent received (Annual Value is less municipal taxes paid i.e. Annual Value = Gross Annual Value minus municipal taxes paid to local authorities)|
|Deemed to be let out||Reasonable rent of a similar place/ locality is to be considered|
What Are The Deductions That Can be claimed Under House Property?
There are certain deductions you can claim and get and reduce your tax outgo if you have income from house property.
A standard deduction rate of 30% is applicable on the Net Annual Value of the property. The best part about this deduction is that it is allowed even when the actual expenditure on the property is higher or lower.
The normal costs that may be incurred may be insurance, repairs, electricity, water supply, etc. An important point to remember here is that as the Annual Value of a self-occupied house is nil, the standard deduction applicable is also nil.
2. Deduction On The Interest Part Of The Home Loan Undertaken
As a homeowner, you can claim a deduction up to INR 2 lakh on the interest of your home loan if you are self occupying the house. You can also claim this deduction if your house is vacant. However, in case you have let out your property, the entire interest on the home loan can be claimed as a deduction.
However, there are certain criteria you must meet else the deduction on interest will be limited to Rs 30,000:-
- The home loan taken should only be for the purchase and construction of the property;
- The loan must be taken on or after 1st April 1999;
- The purchase or the construction, whichever be the case for which the home loan is undertaken should be completed within 5 years from the end of the financial year in which the loan was taken
Apart from the conditions mentioned above, you should remember that an interest certificate is a must for claiming a deduction for the interest payable.
3. Understanding Pre-Construction Interest
There is also a benefit of pre-construction interest that arises when you take a home loan for purchasing or construction.
Two key points for you to remember before claiming this interest are:-
- This cannot be claimed for a loan taken for repairs or reconstruction of the house;
- The amount of pre-construction, as well as interest on housing loan that can be claimed for a particular year, cannot exceed Rs 2 lakhs in any case
Also, you need to keep in mind that the interest is allowed in five equal installments starting from the year in which the house is purchased or the construction is completed. Let us understand this with the help of an example.
Say if the construction of our home gets completed on 15th September 2018 (FY 2018-19), then we are eligible to claim deduction accruing to 1/5th of the interest paid till 31st March 2018 while filing our tax returns for the FY 2018-19.
How Is Income From House Property Calculated
Consider a person who is repaying a home loan. The total amount paid in a particular year amounts to INR 5 lakhs of which INR 2.3 lakhs is the interest component. The person has also incurred a pre-construction interest of INR 2 lakhs.
To understand the scenario better, let us take another example wherein the homeowner earns Rs 10000 monthly from a let-out property and also pays municipal taxes to the tune of Rs 4000 annually.
Let us now calculate the Income from House Property under both the scenarios:-
- In case of self-occupied (I);
- In case the property is let out (II)
|Type of House Property||Self-Occupied (I)||Let Out property (II)|
|Gross annual value (Rent received – 10000*12)||NIL||120,000|
|Less: Municipal taxes paid to the local authorities||NIL||4000|
|Net Annual Value (NAV)||NIL||116,000|
|Less: Standard deduction (@30% of NAV)||NIL||34,800|
|Less: Interest paid on Home Loan||230,000||230,000|
|Less: Pre-construction interest (1/5th of INR 2 lakhs)||40,000||40,000|
|Income from House Property||(270,000)||(351,200)|
|Total interest claim for the year||200,000||200,000|
One important thing to note here is that though the total interest payable for the year is Rs 270,000, the amount of interest that can be claimed is however restricted to INR 2 lakhs as was discussed earlier.
Relief For Home Owners: Key Budgetary Announcements
We all know that the government has been giving a boost to the affordable housing segment and aims to provide Housing for All by 2022.
To further provide a fillip to its existing scheme, in the most recent budget announced by new Finance Minister Mrs. Nirmala Sitharaman, the government provided additional relief to the tune of INR 1.5 lakhs for purchase of a house up to INR 45 lakhs.
So those of us aiming to buy a house under the affordable housing scheme can hugely benefit from this announcement.
Buying your own house is a dream for many and thankfully the government is very encouraging of this. Being aware of the various provisions under which you can get tax relief as a house owner, can go a long way in helping you plan your taxes better.