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Alankar Mishra

December 30, 2024

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Understanding Section 24 of the Income Tax Act

The Income Tax Act of 1961 is one of the pertinent non-legislations which regulate taxation arrangements in the country. That said, Section 24 of the Income Tax Act is the provision that is probably most helpful to property owners. This section concerns the income from house property and seeks to minimize what is a rather perilous income-yielding source for a taxpayer in a provision whereby certain deductions are permitted.

What is Section 24 of the Income Tax Act?

Section 24 tinctures the income from house property by allowing certain deductions. The annual rent (deemed or received) of the house property, or annual value for self-occupied property,49 is subject to such deductions as are allowed under Section 24 which are eligible for such consideration.

Key Highlights of Section 24:

Applies to both owner-occupied and let-out property income.

Also, offer deductions for:

Statutory deduction.

Home loan interest payments.

Components of Deductions Under Section 24

Section 24 allows two primary deductions:

1. Standard Deduction

Under Section 24(a), a straightforward deduction of 30% of the net annual value of the property is permissible if such deductions are temporary.

Such a deduction covers costs such as repairs and maintenance of the property and its costs.

However, it is available regardless of what amount is spent actually on the maintenance of the property.

Note “For a property that is occupied by its owner, the annual value of the property is treated as zero and thus this deduction is not applicable”.

2. Deduction on Interest on Home Loan

Section 24 (B) states that taxpayers can benefit from a deduction regarding the interest on a home loan taken for that property.

Limit of Deduction :

For self-occupied properties :

If the loan is taken out to buy or build a house, then the maximum deduction allowed is ₹2 lakh.

However, if within five years from the end of the assessment year when the fourth instalment was taken and no property is bought/constructed, the limit is decreased to Rs. 30,000.

For let-out properties:

All the interest accrued on the home loan is deductible. However, the total loss from house property (along with the other available deductions) has a maximum limit of ₹2 lakh that can be set off in a year.

Key Conditions for Claiming the Deduction:

The amount borrowed should be either for purchasing, constructing, repairing, or rebuilding the property.

The property construction or its acquisition should occur within 5 years from the end of the fiscal year in which the loan was acquired.

A substantiation for the interest payment should be provided.

Understanding the Tax Treatment for Different Property Types

1. Self-Occupied Property:

For a property used by the owner for residential purposes, the annual value is considered nil.

1. Deduction on interest paid: Up to ₹2 lakh (if conditions are met).

2. Standard deduction: Not applicable, as the annual value is zero.

2. Let-Out Property:

For properties that are leased out or considered leased out:

1. The Annual value is the actual rent received or reasonable rent expected (particulars of municipal value or fair rent).

2. Both normal deduction (30%) and home loan interest are permissible.

3. Deemed Let-Out Property:

A taxpayer can only designate one property as self-occupied, even if he has other such properties. Furthermore, the right to classify the property in this manner rests entirely with the taxpayer. Meanwhile, those deemed let out will be treated as if they are rented out for a specific amount.

How to Calculate Income from House Property

The formula to compute taxable income from house property is as follows:

Net Annual Value (NAV) = Annual Value - Municipal Taxes Paid (if any)

Income from House Property = NAV - Standard Deduction (30% of NAV) - Interest on Home Loan

Examples for Better Understanding

Example 1: Self-Occupied Property

Scenario: Mr A has a self-occupied house property. During the financial year, he pays interest of ₹1.8 lakh on a home loan.

Taxable Income:

Annual value = Nil (self-occupied property) which is available for renting.

Deduction for interest on home loan = ₹1.8 lakh.

Net Income from House Property = ₹0 (since deductions cannot exceed the annual value).

Example 2: Let-Out Property

Scenario: Ms B rents out his property for a monthly rental of ₹20,000. She has borrowed a home loan, on account of which she incurs interest of ₹1.5 lakhs and makes a payment of ₹10,000 towards municipal taxes.

Taxable Income:

Annual value, determined as follows: 240000-10000 = 230000 during the year (240000 (20000*12)- municipal taxes’ amount which is 10000)= 2,30,000

The standard deduction is claimed at 30% of the annual value and the same is worked out to be 69000.

Loan Interest deduction has been claimed to an amount of 1,50,000 as home loan interest.

Net Income from House Property is calculated as 230000 - 69000 - 150000 which comes to ₹11,000.

Impact of Recent Amendments

1. Limiting the Losses in Respect of House Property: Starting from AY 2018-2019 the maximum negative income that can be offset in a given year under income from house property has been restricted to 2 lakh rupees. The losses which are not absorbed offset portions can be carried forward up to 8 years.

2. Extension of the Benefits of Affordable Housing: The loans approved from 1 April 2019 to 31 March 2022 for affordable housing schemes under Section 80EEA provide further interest deductions on interest paid.

‍Key Benefits of Section 24

1. Tax Benefit: Section 24 reduces the tax burden of property owners by way of allowing deductions on the interest so paid.

2. Promotes Home Ownership: Creates benefits to hold ownership of rental and residential properties.

3. Enhances the Rental Earnings: Allowances are given in respect to repair and interest payments on borrowed funds for rented properties.

Common Misconceptions about Section 24

1. Standard deduction is Applicable on Self-Occupied Property: Standard deduction shall not apply where the annual value of the property is determined to be ‘nil’.

2. Interest Deduction and its Limitation Concerning Self-Occupancy Property: Deduction is limited to ₹2 lakh, subject to conditions.

3. Owing Several Properties Automatically Impose Higher Tax Liability: Proper arrangement of exemptions and deductions under Section 24 can be properly done.

Tips to Maximise Benefits Under Section 24

1. Plan Loan Tenure and Amount: Take a home loan onward that has a schedule of monthly income payments such that the interest deductions are maximized for all home loan recipients.

2. Utilise Other Deductions: The payment towards the principal and the interest on the affordable housing loan enables the deduction under section 80E.

3. Invest in Affordable Housing: The Units under PMAY come under the affordable housing schemes which surely give an additional benefit in the form of more tax credits.

4. Keep Proper Documentation: Keep the loan statement and the documents for the property ready to ensure easy filing and verification.

Conclusion

Section 24 of the Income Tax Act is important for people who own properties because it gives them deductions from income earned from taxable house property. If the person lives in a house which he owns or has a residential house let out on rent, this section can help one legally reduce tax.

In case you need assistance in claiming a deduction under Section 24 or planning your investment in real estate, it’s better to speak to a tax professional or a chartered accountant. Planning and compliance would benefit you to the maximum in terms of deductions allowed under this section.

FAQs

What is the tax deduction on home loan interest under Section 24?

A taxpayer will also be allowed to deduct interest expenses incurred on a loan which was taken out to cover the costs of purchasing and home assuming, of course, that the individual uses that property by provisions of section 24. Such interests are eligible for rebate to a maximum of ₹2,00,000. Where let-out properties are concerned, the entire interest paid is allowed subject to some restrictions.

What deductions are allowed under Section 24 of the Income Tax Act?

The tax deductions outlined in section 24 have several benefits but these are not limited to the following:

Standard Deduction: This is the set amount that accounts for 30% of the property’s net annual value.

Interest on Housing Loan: This is the interest derivative that arises out of the housing loan while writing the tax returns.

What is Section 24(b) of the Income Tax Act?

Under Section 24(b), one is permitted to deduct interest on housing loans. Such loans taken for the purchase, construction, repair or even reconstruction of a house are all included.

How is loss from house property treated under Section 24?

As per the provisions of Section 24 of the income tax, an amount of loss has arisen in house property where the total income of house property has been set up at nil level as the balance of self-occupied values of real estate holdings, sustaining deductions (e.g. housing loan interest) from other income up to the amount of two hundreds thousand (Rs. 2,00,000) in each financial year can be carried forward.

How does Section 24 deal with interest on housing loans?

Section 24 permits deductions of interest on a housing loan for the self-occupied property up to 200000 however, for let-out properties, these deductions are allowable without any capping but with the overall loss incurred being capped at 200000 only.

‍Who is eligible to claim a deduction under Section 24?

Section 24 allows people or organizations who don’t earn their income solely from house property to benefit from the deductions of interest paid on their housing loans provided that conditions established by the Income Tax Act are satisfied.

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