Section 24 Of The Income Tax Act: Know How To Compute Income From House Property

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Grip Invest
Grip Invest
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Apr 12, 2024
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    Section 24: 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.

    What Is Income From House Property 

    Income from house property is the rental income received by the owner for a property. 

    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. 


     

    1. Fair rent is the amount of rent that can be charged for a similar property with the same features in the same location.
    2. Municipal value is the rent calculated by municipal authorities. 
    3. Standard rent is rent specified under the Rent Control Act. 
    • 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 

    • Standard deduction @ 30% of NAV
    • Interest paid on home loan (restricted to INR 2,00,000) 


     

    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) 

    1. Higher of fair rent and municipal value to the maximum of standard rent= INR 5, 50,000 
    2. Lower of “A” and standard rent = INR 5,30,000 
    3. Higher of “B” and actual rent = INR 5,30,000

    INR 5,30,000

    Less: Municipal Tax 

    INR 30,000

    Net Annual Value (NAV) 

    INR 5,00,000

    Less: Deductions Under Section 24 

    • Standard deduction @ 30% of NAV
    • Interest paid on home loan (no limit) 

    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: 

    • 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. 
    • 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.
    • 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. 

    • Municipal Tax: The tax paid to the municipal corporation of your property’s locality. This is a tax deduction from rental income (GAV).

    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.


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