Section 24B of Income Tax Act: Deductions of Interest on Housing Loan
Section 24B of the Income Tax Act allows a taxpayer to claim a deduction on the interest of a loan borrowed for purchasing, constructing a new house, or renovating or repairing an existing home.
If you are interested in knowing more about this Section of the IT Act, keep reading!
Is There Any Specific Type of Loan to Claim Deduction Under Section 24B?
No, Section 24B of the Income Tax Act allows a taxpayer to claim deduction on interest irrespective of the loan type. So, whether an individual avails a personal or a housing loan, they can claim deduction on interest. The only condition is that the funds sanctioned is utilised for purchasing, constructing a new home or reconstruction, repairing or renovating an existing house.
Moreover, if an individual instead of taking a housing loan, pays the selling price of housing property along with interest to a seller in installments, in that case, he or she can also enjoy a deduction on the interest payable under this section.
What Is the Maximum Deduction Limit Under Section 24B?
The maximum deduction limit on the interest of a loan is ₹ 2,00,000. It is applicable for both rental and self-occupied housing property. Individuals can avail benefit for two self-occupied housing properties with effect from AY 2020-2021.
However, the deduction limit of ₹ 2,00,000 can be reduced to ₹ 30,000 in case of the following situations:
- If an individual borrowed a loan before 1st April 1999 to buy or construct a new housing property
- A taxpayer borrowed a loan on or after 1st April 1999 to re-construct, repair or renovate an existing house.
- If an individual borrowed a loan on or after 1st April 1999 and house construction is not completed within 5 years from the end of the previous year during which the loan was taken.
What Is the Deduction Limit of a Co-Borrower of a Home Loan?
Co-borrowers of a housing loan can claim a deduction on interest against their percentage share in the loan. It is also essential that a co-borrower is also a co-owner of housing property against which that loan was borrowed to enjoy a tax deduction. Moreover, if a co-owner alone repays the total loan amount, then he or she can avail deduction on the total interest paid towards that loan himself.
Each co-borrower in a joint loan can claim a maximum deduction of ₹ 2,00,000 or ₹ 30,000 on interest individually, whichever is the case. This deduction limit applies to self-occupied houses and is not valid for rental properties.
How to Calculate Tax Under Section 24B?
Let’s take an example to compute tax deduction, following the guidelines of Section 24B of the Income Tax Act:
Ms Reema earns an annual salary of ₹ 12,00,000. Apart from it, she earns a rental income of ₹ 2,00,000. On 24th June 2021, she borrowed a loan in which the interest component is ₹ 2,50,000 in a financial year. She invests in tax-savings schemes, where she can avail a maximum deduction of up to ₹ 1,50,000 under Section 80C, whereas the maximum deduction limit under Section 24B is ₹ 2,00,000.
Now, the calculation is as follows:
| Particulars | Value |
|---|---|
| Annual salary | ₹ 12,00,000 |
| Add: Rental income | ₹ 2,00,000 |
| Total annual income | ₹ 14,00,000 |
| Deduct: Deduction on interest paid towards home loan under Section 24B | ₹ 2,00,000 |
| Deduct: Deduction under Section 80C | ₹ 1,50,000 |
| Taxable income | ₹ 10,50,000 |
| Income Tax Slab | Tax Percentage | Tax Amount (in INR) |
| 0-2.5 Lakh | 0% | 0 |
| 2.5-5 Lakh | 5% | 12,500 |
| 5-7.5 Lakh | 20% | 50,000 |
| 7.5-10 Lakh | 20% | 50,000 |
| 10-10.5 Lakh | 30% | 15,000 |
Hence, total tax liability = ₹ (12,500+50,000+50,000+15,000) = ₹ 1,27,500.
Alternatively, if there was no rebate available under Section 24B, the tax liability would have increased further to ₹ 1,87,500 as the taxable income would have been ₹ 12,50,000 instead of ₹ 10,50,000.
Thus, Section 24B of the Income Tax Act allows individuals to lower their tax liability by claiming tax deduction against interest paid towards a loan used for constructing, purchasing or renovating a house.
Frequently Asked Questions
Is tax deduction on interest paid before construction or acquisition of a housing property allowed under Section 24B?
Yes, taxpayers can enjoy a tax deduction on interest paid a year before constructing or acquiring a new housing property. The deduction is allowed in five equal instalments at the beginning of the year when that house was built or purchased.
Are charges on unpaid interest eligible for tax deduction under Section 24B of the Income Tax Act?
No, individuals cannot claim a tax deduction against the penalty on unpaid interest under Section 24B.