Section 24 of the Income Tax Act: Types of Deductions From Housing Loans

section 24 of income tax act — (Source: shardaassociates.in)

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.

What Is Section 24 of the Income Tax Act?

Section 24 of the IT Act considers the interest on a home loan for a tax deduction. It also includes "deductions from income from house property." There is no compulsion to reside in a house against which an individual claims tax deduction.

Following are the categories which are considered as income arising from housing property:

If an individual rents a house, the rental income is considered.
In case an individual owns more than one house, the Net Annual Value of all housing property is his or her income except one where he or she resides.
If an individual owns a house and resides in that house only, the income estimated from that housing property is zero.

So, note that income arising from the annual value of additional housing property and rental income is taxable after being subjected to deductions under Section 24 of the Income Tax Act.

What Are the Types of Deduction Under Section 24 of the Income Tax Act?

Three types of deduction are considered under Section 24 of the Income Tax Act:

1. Standard Deductions

Eligible candidates can claim this deduction of 30% on the Net Annual Value. This deduction is applicable irrespective of the actual expenses on the repairs, insurance, etc., while purchasing a property. Since the Annual Net Value of a self-occupied house is zero, the standard deduction is zero by default.

2. Deduction on Interest on Housing Loan Under Section 24

Borrowers can enjoy income tax deductions of up to ₹ 2,00,000, while if an individual files an income tax return for the financial year 2013-2014, he or she can claim a deduction of up to ₹ 1,50,000 on the interest paid towards a home loan. This is applicable for owners residing with their family in that house against which they borrowed the home loan. This 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.

3. Municipal Deduction

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.

What Are the Conditions to Claim Deduction on Home Loan Interest?

To claim a deduction of up to ₹ 2,00,000, 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 is 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.

This deduction limit on the home loan interest 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.

What Are the Exceptional Situations Under Section 24 of ITA?

Here are some of the exceptional rules under Section 24 of the Income Tax Act:

If owners do not occupy a housing property, they can claim an income tax deduction without an upper limit on the overall interest paid to the home loan.
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.
There is no rebate on home loan interest under Section 24 for expenses incurred on brokerage to arrange a tenant or additional charges payable towards a loan.
When individuals borrow a home loan to construct or purchase a house, they can claim a deduction on the interest payable towards a home loan while the housing property is under construction.

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.

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.

How to Evaluate Income Received from Housing Property?

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 –

Self-occupied property
Rental property

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).

The results are represented through a table mentioned below:

Particulars of Calculation	Rental Property	Self-Occupied Property
Gross Annual Value (Rental Income = ₹ 10,000*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.

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.

Frequently Asked Questions

✓ What is the difference between Section 80EE and Section 24 of the Income Tax Act?

The primary difference between Section 80EE and 24 of the ITA is that individual taxpayers can claim a maximum tax deduction of ₹ 50,000 in a financial year in the case of the former. It is applicable on the property bought by that individual or jointly with another member.

On the other hand, the maximum deduction limit in Section 24 of the Income Tax Act is ₹ 2,00,000 on self-occupied or vacant property.

✓ Can you claim Section 80EE and Section 24 of the Income Tax Act in a similar financial year?

Yes, you can enjoy tax benefits under Section 80EE and Section 24 of the ITA in a similar financial year.