It is no secret that buying a home is a dream come true. Today, banks and other financial institutions have made it much easier for people to make that dream a reality through home loans, and the government offers benefits to homebuyers who take out home loans as well. The government recognizes housing as an essential asset and
therefore offers tax deductions on various investments towards your first home in different sections.
Under Section 24 of the Income Tax Act specifically, eligible borrowers can enjoy tax deductions on the interest paid towards their home loan. Read on to understand more about home loan tax benefits under Section 24 and how you can make your income tax calculation process easier and more seamless.
What Is Section 24 Of The Income Tax Act 1961?
Section 24 pertains to the interest that a person pays on home or property loans.
According to Section 24, the following categories of income fall under the umbrella of ‘income from house property
1. Individual(s) renting a house – If you rent your house out to a tenant, the rent you receive will be counted as part of your income.
2. Individual(s) owning more than one house – The net annual value of all the houses you own, except the one where you reside, will also be considered part of your income.
It is important to note that if you own only one home and reside in it, there is no rental income, and therefore cannot be used to claim a home loan tax benefit.
Types Of Tax Deductions Under Section 24
a) Standard Deduction
The first deduction available under Section 24 is the standard deduction. It allows taxpayers to claim a flat deduction of 30% of the net annual value (NAV) of the property. This deduction is applicable regardless of expenses such as repairs, utilities, maintenance and collection charges.
b) Deduction On Interest On Home Loans
Another vital deduction under Section 24 is the interest paid on home loans. If you have taken a loan to purchase or construct a home, the interest you pay on the loan’s principal amount is exempt from taxes. You can seek deductions on the interest paid before the construction or purchase is completed in 5 equal instalments – from the
year in which the house is bought or the construction is completed. However, if the loan is taken out for renovation or reconstruction, you cannot claim tax deductions until the renovation is complete.
For self-occupied properties, taxpayers can claim a maximum deduction of up to ₹2 lahks per year. However, in the case of let-out properties, the entire interest paid can be claimed as a deduction, without any upper limit. It’s important to note that this deduction is available under Section 24(b) and is separate from the principal repayment deduction available under Section 80C.
c) Municipal Deductions
The municipal deduction refers to the yearly amount an individual pays to the municipal corporation of their local area. This payment is subtracted from the total annual value of a residential property to determine its net annual value. Homeowners who have fulfilled their municipal tax obligations in a given fiscal year are eligible to claim tax deductions based on this particular provision.
Exemptions Under Section 24
Deduction for interest on borrowed capital shall be limited to Rs. 30,000 under the following conditions:
a) If capital is borrowed before 01-04-1999 for the purchase or construction of a house property;
b) If capital is borrowed on or after 01-04-1999 for reconstruction, repairs or renewals of a house property;
c) If capital is borrowed on or after 01-04-1999 but construction of house property is not completed within five years from the end of the previous year in which capital was borrowed.
d) Self-Occupied Property: If a taxpayer owns a single self-occupied property, the income from that property is considered nil for tax purposes. However, this exemption is limited to one property only. If an individual owns more than one house property, the taxpayer can choose one property as self-occupied, and the others are treated as
let-out properties for tax purposes.
e) Loss From House Property: Section 24 also allows taxpayers to set off the loss from house property against other heads of income. This means that if the annual interest and other expenses on a house property exceed the rental income, the resulting loss can be adjusted against income from other sources like salary or business profits. The loss can be carried forward for up to eight assessment years to be set off against future income from the house property.
Understanding the deductions and exemptions under Section 24 is crucial for taxpayers, as they can significantly impact taxable income and tax liability. By utilizing the available deductions, individuals can reduce their overall tax burden and optimize their financial planning. It is essential to consult a tax professional or refer to the latest
provisions of the Income Tax Act for accurate guidance and interpretation of Section 24. Remember, tax planning should always be aligned with the prevailing tax laws to ensure compliance and avoid any legal issues.