We all once-in-a-lifetime dream of having our own house But it has become hard due to the skyrocketing prices of houses in metro cities and even in tier-2 cities. Therefore, the government of India has come up with section 24 of the income tax act,1961 to provide some relief to home buyers. Section 24 grants relief through various tax breaks for buying a house rewarding those who invest in it.
What is section 24?
Section 24 of the Income Tax Act, of 1961 considers the amount of interest that you pay for home loans. This is also considered as “Deductions from house property income.” Fundamentally, section 24 lets you claim tax deductions on the interest amount paid on your home loan.
There are numerous sections in the Income Tax Act that enable you to get tax exemptions on particular investments and expenditures. The government understood that having your own house is one of the most important needs & assets, and multiple investments towards your first home are exempted from tax payments.
However, an important section (Section 24) regarding home loans allows you to get exemptions on the interest you pay for the home loans you have taken. Section 24 is applicable in the following situations-
- In case you have let out your home for rent, then the received rent from the home would be considered as income from the house property.
- If you possess multiple houses, then the net annual value (NAV) of the houses will be considered as your income except for the house you are living in.
Deductions under section 24
There are two types of deductions under section 24 income tax act, of 1961.
Standard Deduction - The standard deduction is 30% of the Net Annual Value calculated above. This deduction of 30 per cent is authorised even when your actual expense on the property is lower or higher. Therefore, this deduction is not respective to the actual expense you may have incurred on repairs, insurance, electricity, water supply etc. In the case of self-occupied house property (when the Annual Value is Ni) the standard deduction would also be zero.
Interest On loan - The interest you pay on the principal amount of the loan you have taken for the home’s construction, renovation or purchase will be tax-exempted. The following are the sub-sections-
- The homeowners can claim deductions up to Rs. 2 lacs for their self-occupied house residing with his/her family or without the family. However, the same treatment will be applicable in the case of vacant houses.
- If you had a loan for the purchase or construction of a property (not rebuilding) before buying or construction completion, you can still claim the interest. You can also grant the deductions on the interest paid before the completion of construction or purchase, from the year in which the house is bought or the construction is completed.
- The construction must be completed within 5 years from the end of the financial year in which the loan was taken.
- If you have taken a loan for the renovation or reconstruction of a house, then you can not claim the deductions until the renovation is completed.
PRE-CONSTRUCTION INTEREST ON HOME LOAN
You can claim deductions on the interest when you grant a loan for the purchase or construction of a house property. However, you will not be allowed to claim in case of repair or reconstruction.
The net amount of pre-construction should not be more than Rs. 2 lakh (Including the interest on the housing loan to be claimed). The deduction on this interest is allowed in 5 equal instalments from the start of the year in which the house is purchased or completed.
Conditions to claim deduction under section 24
You need to satisfy the following three conditions before availing of the deductions under section 24.
- The loan was taken after 1st April 1999 for construction or acquisition.
- The purchase or construction must be completed within five years following the end of the fiscal year in which the loan was taken.
- A certificate will be present for the interest payable on the loan.
Here it is to be noted that your interest deduction may be determined by the limit of Rs. 30,000 if any of the following conditions are met –
- The loan is borrowed before 1st April 1999 for the purchase, construction, repairs or reconstruction of the house property
- The loan is borrowed on or after 1st April 1999 for the purchase, construction, repairs or reconstruction of the house property.
What are the exceptions under section 24?
- You can avail exemption for the complete interest amount paid by you without any limit in case the house is not occupied by you.
- There is no tax exemption provided for the brokerage or commission that one has to pay to set up a tenant or loan.
- In case the house is not occupied by you because you reside in another town for your employment or business, and you live in another property/rented property in the city of your employment/business, then you can claim a tax rebate on interest payable only up to Rs. 2 lakh.
- The house owners must have a certificate of interest for the house loan they have taken.
- If the construction of your house building is not completed within 5 years then you can only claim Rs. 30,000 rather than Rs. 2 Lakhs.
Important points to remember while calculating the Income from the house property
Calculating income from the house property is not a piece of cake. The calculation can be perplexing for you as there are certain essential terms that you need to know. Following are the essential things that you must know before the calculation of the income from the house property.
- The foremost is the ‘Net Annual Value (NAV)’ of the house that is considered for income tax. The net annual value is computed by subtracting the municipal taxes that are paid for the property from its gross annual value. For instance, if you are getting the annual rent of Rs.2, 50, 000 from your rented house and the municipal tax that you are paying is Rs.50,000 then the NAV of the house is Rs. 2, 00, 000.
- The rent will be calculated only for the duration of availability of the tenants in the house. If the house is vacant for some specific time period then the same vacant duration will be counted. For instance- You have a property which was vacant for the last 7 months and later it was rented out for Rs. 20,000 for 5 months of that financial year. Now the gross value of the house will be computed for 5 months and it will be Rs. 100,000 (20,000*5). However, the payable tax would be computed after deducting the municipal tax and 30% of the standard deduction.
- If the house is not generating any income for you and remains vacant, but you are still paying the municipal taxes, then you can offset the loss of income from different means such as rent from other property or salary during the same financial year. However, if you are somehow unable to offset the losses in the same financial year, then you can also carry forward losses for up to eight years.
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