Section 24 Of The Income Tax Act: Know How To Compute Income From House Property
What Is Section 24 Of Income Tax Act
Section 24 of Income Tax Act allows you to deduct the interest you pay on a home loan from your taxable income. The deduction is different if the owner or his family resides in the house property (self-occupied) than if it is on rent (let-out). This section is also called “Deductions from house property income.”
Understanding various types of income from house property is essential to best use Section 24 of the Income Tax Act. Let us examine what constitutes income from house property and deductions from house property income in detail.
Section 24 Under Old vs New Regime
Section 24 of the Income Tax Act allows for a deduction for interest paid on a housing loan. The deduction is claimed under the 'Income from House Property' head, which is relevant for borrowers looking to reduce taxable income.
Under the old tax regime, taxpayers could claim a Section 24(b) deduction up to INR 2 lakh on the interest they paid on a housing loan for a self-occupied property. It is a valuable benefit for any home loan borrowers as they are repaying their EMI, which will lower their taxable income, along with other types of deductions. Therefore, this regime is ideal for an individual who is paying a large amount of interest on a housing loan.
Under the new tax regime, there is no deduction available for self-occupied properties in Section 24(b). However, there is some deductibility of interest paid with an overall loss of INR 2 lakh for let-out properties in which no carry forward is allowed. These limitations make the new tax regime less tax-efficient and do not provide much benefit to home buyers who are paying EMIs. Nonetheless, it is useful to some extent for individuals who have very few other deductions.
Section 24 vs Section 80C vs 80EEA
Deductions under section 24, 80C, and 80EEA are for home loans. Each of these sections will address different aspects of the loans. Here’s how they compare:
Section | What it covers | Maximum Deduction | Key Condition |
Section 24 | Interest on the home loan (self-occupied) | INR 2 lakh p.a. Self-occupied and full interest if let out | Post-construction must be completed in 5 years
|
Section 80C | Principal repayment and other investments | INR 1.5 lakh p.a. stamp duty and registration included | You must hold the home for a minimum of 5 years |
Section 80EEA | An additional interest benefit for first-time home buyers | INR 1.5 lakh p.a. in addition to 24(b) & 80C | The loan must have been between April 19 and March 22, and the property must be ? INR 45 lakh with no other property at sanction. |
What Is Income From House Property
Income from house property refers to the rental income earned by an individual from owning residential or commercial property. Under the Indian Income Tax Act, this income is taxed under a separate head, regardless of whether the property is actually rented out or deemed to be let out. Even if the property is vacant or self-occupied, certain conditions may lead to a notional rent being considered for taxation purposes. The key requirement is ownership, only the legal owner is liable to pay tax on such income.
This category of income allows for specific tax deductions, making it essential for property owners to understand how it works. For example, a standard deduction of 30% is allowed for maintenance, irrespective of actual expenses, and home loan interest (up to ?2 lakh for self-occupied property) can also be claimed. Understanding these provisions helps individuals optimise their tax liability and manage real estate investments more efficiently.
Types Of House Property Under Income Tax
1. Self-Occupied: This property is used for residential purposes and is occupied by the owner or his/her family. According to the rules, you can choose two self-occupied properties. All other properties will be considered let out.
2. Let-Out: A property rented out partially or wholly is considered let out.
3. Deemed Let-Out: For taxation, a property is considered to be let out, even if it is not actually rented out. It is a vacant property that is not used for self-occupation or letting out.
How To Calculate Income From House Property For Income Tax Purposes
To calculate income from house property under section 24 of Income Tax Act, you can follow these steps:
1. Determine gross annual value (GAV). This is the annual rental income from the property and can be calculated as follows:
- For Self-Occupied Property
The GAV for a self-occupied property is 0.
Note: A maximum of 2 self-owned properties can be considered self-occupied.
- For Let-Out Property
GAV is equal to the actual rent received on the property.
Step 1
Take the higher value between fair rent1 and municipal value2.
| Step 2
Take the lower value of “step 1 figure” and “standard rent3”. You will get the Expected Rent. | Step 3
Take the higher value of “Expected Rent” and “actual rent received.” You will get the GAV.
|
| ||
- Deemed To Be Let-Out
It refers to the expected notional rent of a vacant property that is considered to be let out. The GAV deemed to be for let-out properties is the expected rent on the property. (Follow steps 1 and 2 given in the let-out property section.)
2. Subtract property taxes levied by the municipality from GAV to determine the net annual value (NAV).
NAV= GAV - property tax
3. Subtract the standard deduction. Under the Income Tax Act, you can claim a standard deduction of 30% of NAV and an actual deduction on home loan interest. For self-occupied properties, NAV will be nil.
4. Subtract interest on home loan deduction.
You will lose the house if you claim a deduction on home loan interest for self-occupied properties because GAV is 0. A maximum of INR 2,00,000 of this loss can be offset with other sources of income, such as salary and interest income.
5. You have the final value of income from the house property. This income is taxable according to your tax bracket.
Calculation Of Income From House Property In Self-Occupied And Let-Out Case
- For Self-Occupied Property
“X” owns a house property. Assuming the interest paid on his home loan is INR 2,50,000, the income from the self-occupied house can be calculated as
Gross Annual Value | Nil |
Less: Municipal Tax | Nil |
Net Annual Value (NAV) | Nil |
Less Deductions Under Section 24
|
Nil INR 2,00,000 |
Loss From House Property (a maximum loss of INR 2,00,000 can be offset against other income) | INR 2,00,000 |
- For Let-Out Property
“Y” owns a house that is let out for the entire year. Let us assume the municipal value, fair rent, standard rent, and actual rent are INR 5,50,00, INR 5,40,000, INR 5,30,000, and INR 5,20,000, respectively, and municipal tax is INR 30,000.
GAV (considered nil for self-occupied property)
| INR 5,30,000 |
Less: Municipal Tax | INR 30,000 |
Net Annual Value (NAV) | INR 5,00,000 |
Less: Deductions Under Section 24
| INR 1,50,000 INR 3,00,000 |
Income From House Property (GAV - Municipal Tax - Applicable Deductions) (In case of loss, a maximum loss of INR 2,00,000 can be offset against other income)
| INR 50,000 |
What Are The Deductions On House Property Under Section 24?
Exemptions under Section 24 of Income Tax Act are as follows:
1. Standard Deduction: You can get a deduction of 30% on NAV under Section 24(a). This deduction relieves any maintenance charges you may incur during the year. It is irrespective of the actual expenses incurred.
2. Interest On Home Loan: You can claim this under Section 24(b). It allows you to deduct up to INR 2,00,000 in case of self-occupied property. Meanwhile, for let-out properties, the entire interest is deductible, but loss from house property is still restricted to INR 2,00,000.
2. Pre-Construction Interest: Deductions on home loan interest can only be claimed after the construction is completed. However, you can also claim a deduction for interest paid on a home loan during the pre-construction period. Please note that you can claim this only after the construction is completed. The deduction is allowed in 5 equal instalments, up to a maximum of INR 2,00,000 annually.
Note: It is not allowed for reconstruction or repairs. This deduction is included in the limit of INR 2,00,000 for interest on a home loan (self-occupied). This means “interest on home loan” + “preconstruction deduction limit” should not exceed INR 2,00,000. There is no limit for let-out property.
3. Municipal Tax: The tax paid to the municipal corporation of your property’s locality. This is a tax deduction from rental income (GAV).
Common Mistakes To Avoid
Even minor mistakes can reduce your claim under Section 24. Here are some common mistakes you should avoid:
1. Principal and Interest Component combined
Home loan EMIs consist of both principal and interest. However, only the interest portion is a deduction under Section 24. It is one of the common mistakes made by taxpayers to claim the entire EMI amount as a deduction. Therefore, it is inaccurate and could lead you to receive notices and the possibility of an assessment disallowance. It is prudent to check the lender's interest certificate and claim your correct amount.
2. No Claim for Pre-Construction Interest
The interest paid during the pre-construction phase can be claimed as a deduction over 5 equal annual installments commencing from the year the property was constructed. It is not permissible to claim this amount in one year. Moreover, make sure you are claiming from the correct assessment year to avoid disallowance.
3. No proof of Rental Received
It is important to have clear proof of rental receipts or bank credit in the case of let-out properties. Any deductions you claim could become subject to corrected or disallowed deductions if the tax department asks for an inquiry and you don't have physical documentation. Hence, make sure to have up-to-date and easily accessible records.
4. Not Reporting Deemed Rent
If you are a property owner with multiple houses, then you may have to declare two houses as self-occupied. Any additional property counts as deemed to be let out and should have the deemed rent reported accordingly. You are raising a red flag that will be viewed as an attempt at income suppression by the tax authorities if you don't report deemed rent.
Conclusion
Understanding the details of Section 24 of Income Tax Act can help you make smarter tax decisions for income from house property. If you are a homeowner or planning to buy a home, clarity on deductions, gross annual value, and the net annual value of house property is essential to avoid tax discrepancies.
To learn more about investment and financial planning, stay tuned to Grip Invest.
Frequently Asked Questions On Section 24 Of Income Tax Act
1. What are the tax benefits of home loans?
Section | Deduction on | Upper Limit |
Section 24 | Interest on home loan | INR 2,00,000 for self-occupied property No limit for let-out property |
Section 80 C | Principal repayment for a home loan | INR 1,50,000 |
2. Can I claim both Section 80EE and Section 24?
Yes, you can claim both if you meet the conditions for both.
3. Can I claim tax benefits under Section 24 every year?
Yes, you can claim a deduction under Section 24 on interest until your loan is repaid completely.
4. What is the difference between Section 24 and Section 80C?
Section 24 allows a deduction on house loan interest with a maximum deduction of ?2 lakh. Whereas, Section 80C allows principal repayment and any other investments with a maximum deduction of ?1.5?lakh.
5. Can I claim a deduction under Section 24 and Section 80EE together?
Yes, you can first claim up to ?2 lakh from section 24(b) and then claim a deduction under section 80EE of a maximum of ?50,000 for first buyers if eligible.
6. Is Section 24 deduction allowed in the new tax regime?
No, there is no deduction under Section 24(b) for interest on self-occupied home loans in the new tax regime.
7. How is notional rent calculated for deemed to be let-out properties?
Notional rent is the higher of actual rent or municipal value and is thereafter also capped at standard rent. Subtract municipal taxes and apply the standard deduction of 30%, then deduct loan interest to calculate it.
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