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Purchasing a home involves a substantial investment. Hence, several individuals opt for external financial assistance through a home loan. Section 24 of the Income Tax Act allows eligible borrowers to enjoy tax deduction on the interest paid towards that home loan.
Section 24 of the IT Act describes deductions available from income from house property. It allows the interest on a home loan as a tax deduction along with other deductions. There is no compulsion to reside in a house against which an individual claims tax deduction.
[Source]
Following are the categories which are considered as income from housing property:
If an individual rents a house, the rental income is considered.
In case an individual owns more than two houses the Net Annual Value of all houses except two house properties is considered as his or her income. If an individual owns up to two houses, the income estimated from that housing property is zero. [Source]
So, note that income arising from the annual value of additional housing properties and rental income is taxable after being subjected to deductions under Section 24 of the Income Tax Act.
Three types of deduction are considered under Section 24 of the Income Tax Act:
Taxpayers can claim a deduction of 30% on the Net Annual Value. This deduction is applicable irrespective of the actual expenses on the repairs, insurance, etc. Since the Annual Net Value of a self-occupied house is zero, the standard deduction is zero by default.
[Source]
Borrowers can enjoy income tax deductions of interest on housing loan. Deductions are available up to ₹ 2,00,000 for self-occupied house properties while there is no limit on deductions available on property that is rented out. This is applicable for those residing in that house against which they borrowed the home loan and it is also valid for vacant houses. If an individual rents a house, the entire interest of a housing loan qualifies for an income tax deduction.
[Source]
Individuals are liable to pay a municipal tax annually to the Municipal Corporation of the respective area. This municipal tax is subtracted from the Gross Annual Value to obtain a housing property's Net Annual Value. House owners who have paid the municipal tax in a given financial year can claim a deduction on municipal tax on that year.
[Source]
To claim a deduction of up to ₹ 2,00,000 on self-occupied house properties, individuals need to meet the following conditions:
Individuals borrowed a home loan on or after 1st April 1999 to construct or purchase a housing property.
The house must be acquired or constructed within 5 years (it was 3 years till FY 2015-2016) from the completion of a financial year in which an individual borrowed this loan.
Assesse should own an interest certificate for the interest payable towards the borrowed fund. [Source]
This deduction limit on the home loan interest for self occupied properties can be limited to ₹ 30,000 under the following circumstances:
If a candidate fails to meet the above conditions, he or she can claim a tax deduction of ₹ 30,000.
Individuals borrowed a loan before 1st April 1999 to repair, reconstruct their house, or purchase or construct a new home.
Borrowers obtained the loan on or after 1st April 1999 to repair, reconstruct their house or renovate existing housing property.
If the loan was borrowed on or after 1st April 1999 but the construction was not completed within 5 years from the end of the financial year in which the loan was taken. [Source]
Here are some of the exceptional rules under Section 24 of the Income Tax Act:
If owners have a let out house property they can claim an income tax deduction without an upper limit on the overall interest paid to the home loan. [Source]
If individuals do not occupy a house and reside in a rented property in other cities due to their employment or business purpose, they can claim a tax deduction of up to ₹ 2,00,000 on interest paid to a home loan. The property can still be considered as self occupied. [Source]
There is no deduction under Section 24 for expenses incurred on brokerage to arrange a tenant or additional charges payable towards a loan. [Source]
This deduction will be arranged in 5 equal instalments for every financial year. Individuals will receive the first instalment in the year of completion of construction or purchase of a house.
[Source]
However, this is not applicable if an individual uses the fund sanctioned under a home loan to repair or reconstruct an existing house. The maximum deduction limit in this scenario is not up to ₹ 2,00,000, it is Rs. 30,000.
[Source]
To understand how to compute the income earned from housing property, let's take a look at an example:
Mr. Amit takes a home loan of ₹ 4,00,000, and the interest that he pays annually is ₹ 2,00,000 and paid the interest of ₹ 1,50,000 when the housing property was under construction. His monthly rental income is ₹ 30,000 from the property. He pays ₹ 10,000 as municipal tax for the house. Now, let's compute his income based on two factors –
The formula to calculate the total income earned from a housing property is -
Income From Housing Property = (Net Annual Value - Standard Deduction) – (Home Loan Interest + Pre-construction Interest).
[Source]
|
Particulars of Calculation |
Rental Property |
Self-Occupied Property |
|
Gross Annual Value (Rental Income = ₹ 30000*12) |
₹ 3,60,000 |
NIL |
|
Less: Municipal Taxes |
₹ 10,000 |
NIL |
|
NAV or Net Annual Value |
₹ 3,50,000 |
NIL |
|
Less: Standard Deduction (30% of Net Annual Value) |
₹ 1,05,000 |
NA |
|
Less: Home Loan Interest |
₹ 2,00,000 |
₹ 2,00,000 |
|
Less: Pre-Construction Interest (1/5th of ₹ 1,50,000) |
₹ 30,000 |
₹ 30,000 |
|
Total Income Earned from Housing Property |
₹ 15,000 |
-₹ 2,30,000 |
|
Total Loss Limited to |
- |
₹ 2,00,000 |
Individuals can adjust the total loss in income earned through a housing property with other income sources up to ₹ 2,00,000. They can carry forward the remaining loss for 8 years. However, they can adjust this remaining amount only against income earned from housing property.
[Source]
Thus, this is all about Section 24 of the Income Tax Act. Additionally, consider the pointers while evaluating the total income earned from a housing property to avoid any inconvenience.
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