Section 24 of the Income Tax Act

Owning a house is like a dream come true for most people. Besides being a status symbol, it is also an investment that keeps appreciating. However, with real estate prices shooting up, buying a house with one’s own financial resources is becoming more challenging. That’s where home loans come in.

Besides providing finances to buy a house, home loans also offer tax benefits. Section 24 of Income Tax Act provides an exemption on the interest paid on the home loan.

This has enabled people from different economic backgrounds to dream big and own a house. Let's now take a close look at Section 24 and how it helps make your dream of having a house of your own a reality.

What is Section 24 of Income Tax Act

Section 24 of Income Tax Act allows tax deductions for the interest paid on home loans and is therefore called ‘Deduction on Income from House Property’.

Under this section, homeowners can claim up to Rs 2 lakh in tax deductions for the interest paid on home loans if the property is self-occupied. If the property is rented out, one can claim deductions for the entire interest paid on the home loan. 

Section 24 of Income Tax Act - Deductions under House Property 

Now that you know what Section 24 of the Income Tax Act states, let’s learn its concepts in detail.

• 24(a) Standard deduction - 30% of net annual rental income is deducted as a Standard deduction

• 24(b) Interest on loan - if you have taken out a home loan, the interest paid on the loan amount is exempt

Let’s explore these concepts in detail.

• Tax Deduction on Rental Income

The standard deduction is a tax deduction for properties that are rented out. Section 24(a) of the Income Tax Act provides for a deduction of 30% of the net annual rental value of the property in the form of standard deduction. However, this tax deduction is not available for properties used by the owner. 

Let's take an example.

Ayan is a property owner who has put his property out on rent, from which he generates rent of Rs 10,000 per month, or Rs 1.2 lakh per annum. Since the property is rented out, he can claim 30% of the annual rental as standard deduction under Section 24(A). This works out to Rs 36,000.

• Tax Benefits for Home Loan Repayment

Section 24(b) of the Income Tax Act allows you to claim a tax deduction for self-occupied property bought with a home loan. It allows a deduction of up to Rs 2 lakh every financial year on the payment of interest on a housing loan under Section 24 if the property is self-occupied.

The total tax deduction benefits depend on the amount you actually repay each year. If you have chosen to take out a loan for the purpose of building, buying, rebuilding, or repairing a property, you may be eligible for tax deductions under Section 24(b). However, you do not qualify for tax benefits under this section if you take out a loan to pay an agent or mediator's brokerage or commission. 

• Pre-construction interest

If the property is purchased on a loan, you can enjoy the benefits by claiming pre-construction interest of up to Rs 2 lakh. After completion of construction, the interest is to be paid in five instalments. 

Eligibility to Claim Deduction under Section 24(b)

To enjoy the benefits of tax deductions under Section 24, it is essential to meet the eligibility criteria. Let's see what the eligibility criteria are for claiming deductions under Section 24(b).

1. To prove that the interest is payable on the home loan, it is mandatory to have an interest certificate.
2. In order to construct or purchase a residential property, your home loan must be approved on or after April 1, 1999.
3. The house must be purchased or built within five years of the financial year in which the loan was disbursed. 

The following conditions must be met in order to claim an interest deduction of up to Rs 30,000.

• If the amount is borrowed on or after April 1, 1999, for the property, either for construction or acquisition, that has not been completed within 5 years from the end of the financial year in which the capital was borrowed, the deduction is up to Rs 30,000 only.
  
  Taxpayers who borrowed home loans on or after April 1, 1999, for the purpose of reconstructing, renewing, or repairing their houses can claim this benefit.
• If a loan is taken before 1 April 1999 for the purpose of purchasing or building a house, you are eligible for a deduction under this clause. 

Understanding “Income from House Property” under the Income Tax Act

Income from house property under the Income Tax Act is calculated on the basis of the following:

• Annual value of a self-occupied property
• Housing income earned as rent
• The annual value of a property which is treated as 'deemed to be let out' for taxation purposes

Calculation of Income from House Property 

Let’s understand how to calculate income from house property under Section 24 with the following example.

Rohini borrowed Rs 6 lakh as a home loan and paid an annual interest of Rs 2 lakh. During the construction phase, she paid interest of Rs 1.5 lakh. She has put the property on rent and receives a monthly rental income of Rs 30,000. Additionally, she pays a municipal tax of Rs 15,000 for this property.

With this information, let’s calculate Rohini’s income based on two factors. They are-

Income from housing property = (Net Annual Value - Standard deduction) – (home loan interest + pre-construction interest)

*Gross Value for rented income = Rs 30,000*12 = Rs 3,60,000

*Pre-construction interest = It will be divided into five equal instalments, i.e., Rs 1.5 lakh divided by 5 = Rs 30,000

*Loss from self occupied property is restricted to Rs 2 lakh as maximum deduction allowed in this case is Rs 2 lakh.