Section 24 of the Income Tax Act: Know How to Compute Income from House Property

 

Purchasing or constructing a home of your own is the dream of every middle-class Indian. Besides being the symbol of a successful life, buying a home provides you with an asset whose value typically keeps appreciating every year. Moreover, with rents, it can provide a steady source of income. 

However, meeting the one-time cost of buying a home can be quite tough, especially with sky-high prices. Besides convenience, home loans come with tax benefits like Section 24, which provides exemption on interest repayments. 

To know more about Section 24 of Income Tax, keep reading this blog.

What Is Section 24 of the Income Tax Act?

Section 24 of the Income Tax Act allows homeowners to claim tax deductions for the interest that they pay towards home loans. For this very reason, this section is called ‘Deduction from Income from House Property’. 

Under this section,  one can claim a maximum deduction of up to Rs. 2 lakh on interest in a fiscal year that they pay towards the home loan in case of self-occupied property 

If a person is renting a house, then he/she can opt for a deduction on the entire interest they are paying on the home loan. 

Deductions under House Property under Section 24 of Income-Tax Act 

Now that you have an idea of what is section 24 of the Income Tax Act, let's take a look at some benefits under this section. 

Section 24 allows you to claim certain deductions for your income on house property. The points below enumerate these deductions: 

Deduction under section 24 is allowed as under:

24(a) Standard deduction @ 30%

24(b) Interest on Borrowed Capital

• Tax Deduction on Rental Income

You can claim a 30% tax deduction on the lowest net annual value of your property or its rental income. However, self-occupied housing properties cannot avail this deduction under Section 24 (a).

This is also known as standard deduction and provides tax relief for any property and maintenance charges that a particular property can incur during a year. 

• Tax Benefit on Repayment of Home Loan

Section 24 (b) of the Income Tax Act offers annual deductions up to Rs. 2 lakh for repayment of home loans. However, it is important to note that the maximum tax benefit you can claim depends on the actual money you have repaid in a year. 

You can qualify for tax deductions u/s 24(b) if you have opted for a loan for constructing, purchasing, rebuilding, or repairing a property. Nevertheless, you cannot enjoy tax benefits under this section for a loan to pay brokerage or commission to a mediator or agent. 

• Pre-construction Interest

You can claim a deduction on the interest of pre-construction when you take a loan for buying or constructing a house property. However, you cannot claim in case of repair or reconstruction. The total amount of pre-construction, including the interest on the housing loan to be claimed, should not exceed ₹2 lakh. The interest is allowed in five equal instalments starting from the year the house is purchased or the construction is completed.

What Is “Income from House Property “under the Income Tax Act?

To clearly understand what income from house property under the Income Tax Act is, we must consider three instances. Following are a few scenarios that determine how income from house property can occur. 

• Annual value of a self-occupied property

• Housing income that you earn as rent

• The annual value of a property that is treated as 'deemed to be let out' for taxation purposes

The table below presents the variation in the gross annual value of properties that differ for the above cases. 

Instances	Gross Annual Value
Self-Occupied Property	Nil
Property out for rent (Let out property)	Actual annual rent received
Deemed to be let out	Reasonable rent for a similar property considering the location.

Exceptions under Section 24 of Income Tax Act 

Here are a few exceptional situations that a person can face while claiming tax deductions under Section 24 of the Income Tax Act:

• Expenses like brokerage to arrange for tenants or additional charges towards your loan are not allowed as deductions at the time of computing “Income from House Property”.

• If a person does not occupy a house and stays in a rented residence in a different city for employment and other occupational purposes, they can claim a tax deduction of up to Rs. 2 lakh on interest that they pay for a home loan. That property can still be considered as self-occupied. 

Conditions to Claim Interest - Deduction under Section 24(b):

To claim deductions up to Rs. 2 lakh on self-occupied house properties under Section 24, you must fulfil the following conditions:

• You must have an interest certificate to prove payable interest towards your loan. 

• As a borrower, your home loan must be sanctioned on and after 1st April 1999 to build/acquire a housing property. 

You must acquire or construct the house within five years from the financial year of loan disbursal. If you fail to meet the above conditions, you can claim tax deductions of Rs. 30,000. 

 To claim the interest deduction of up to Rs. 30,000, you must fulfil these criteria:

• If you have borrowed the amount on or after 1st April 1999 for the property’s construction/acquisition which has not been completed within five years from the end of the financial year in which capital was borrowed you can avail the deduction upto Rs. 30,000 only. 

• Taxpayers who have borrowed home loans on or after 1st April 1999  for the purpose of reconstruction, renewal or repair of their house they can claim this benefit.

• If you borrow a loan before 1st April 1999 for the purpose of purchase or construction of a house property you are eligible for deduction under this clause. 

Computation of Income from House Property 

To understand how to calculate income from house property under Section 24, let’s consider a simple example. 

Rajesh opts for a home loan of Rs. 4 lakh and pays an annual interest of Rs. 2 lakh on it. His paid interest amounts to Rs. 1.5 lakh when this property was under construction. He has placed this property for rent and earns a rental income of Rs. 30,000 per month. He also pays a municipal tax of Rs. 10,000 for this property. With this information, let’s calculate Rajesh’s income on the basis of two factors. These ares-

• Rental Income 

• Self-occupied property

You can calculate the total income Rajesh earns from his housing property using the formula below. 

Income from housing property = (Net Annual Value- standard deduction) – (home loan interest + pre-construction interest)

The table below represents the results of the computation of income from house property. 

Particulars of Calculations	Self-Occupied Property	Rental Property
Gross Annual Value	Nil	Rs. 3,60,000
Less: Municipal taxes	Nil	Rs.   10,000
Net Annual Value (NAV)	Nil	Rs.     3,50,000
Deduction under section 24:
Less: (a)Standard deduction @30% of NAV	NA	Rs. 1,05,000
Less: (b)Interest on Borrowed Capital	Rs. 2,00,000	Rs. 2,00,000
Less : Pre-construction interest	Rs. 30,000	Rs. 30,000
Overall Interest is Restricted up to	2,00,000	2,30,000
Income/(Loss) from House Property	(2,00,000)	15,000

Points to Keep in Mind While Analysing Income from House Property

Consider keeping a note of the following points while analysing income from a house property. 

• Let’s say that a taxpayer’s house is vacant for an entire year and he/she is residing at different locations for job purposes but is paying municipal taxes for this property. This can act as an offset from salary income. If he/she is unable to offset this within the same year, it may be carried forward up to 8 years.

• Section 24 of Income Tax Act calculates tax on house property from the net annual value of that property 

• Let's say the house in question has been sitting vacant for a period of a year before being let out and the owner or a ‘deemed owner’ receives rent. Computation of taxes must happen on the rent they receive and not for the entire year. 

• Tax Deduction on Municipal Taxes

This refers to any duties &  taxes you pay yearly to the municipality or municipal corporation for owning a house property. The actual tax amount you have paid towards municipal taxes in a financial year can be deducted from the  gross annual value for tax computation before claiming deduction u/s 24.The only condition to claim this tax benefit is that you must be the homeowner and pay the tax amount yourself. 

• If you have opted for a joint home loan for a housing property, all co-applicants can opt for tax deductions under Section 24 in their respective ownership share. However, if a loan applicant passes away before completing the repayments, his/her heir or nominee repaying this debt cannot opt for this tax exemption.

• With effect from Assessment Year 2020-21, deduction for interest paid or payable on borrowed capital shall be allowed in respect of 2 self-occupied house properties. However, the aggregate amount of deduction under this provision shall remain same i.e., Rs. 30,000 or Rs. 2, 00,000, as the case may be.

Applicability of Deductions under Section 24

The table below highlights tax deductions under Section 24 of the Income Tax Act. 

Application	Deduction Available
A rented property purchased with a home loan	Total home loan interest
Rented property purchased with your own money.	30% standard deduction on NAV
Self-occupied property purchased with housing loan	Rs. Maximum deduction of Rs. 2 lakh on home loan paid in a financial year

Finally, this article covers everything you may have wished to know about Section 24 of the Income Tax Act. Consider keeping the above-mentioned points in mind as you analyse your total income from housing property. 

FAQs on Section 24 of the Income Tax Act

Q. Can I claim tax benefits under Section 24 of the Income Tax Act every year?

Yes, you can claim tax deductions under Section 24 of the Income Tax Act on the interest component of your home loan till the end of your loan repayment tenure.

Q. Can I claim both Section 24 and 80EE? 

If you can satisfy all conditions mentioned under Section 24 and Section 80EE, you can claim benefits under both these sections.

Q. What is the maximum limit of deduction under Section 24 for self occupied property?

The maximum deduction limit under Section 24 of the Income Tax Act is Rs. 2, 00,000 

Q. Can we claim both HRA and a home loan?

A taxpayer can claim both House Rent Allowance (available as part of salary) and home loan-related deductions only if the taxpayer is working in a different city and staying on rent, while the home loan is taken for a house property in a different city where the family of taxpayer resides. If the taxpayer stays in a rented accommodation and has rented out a house property against which the home loan is taken, both HRA and home loan deductions can be claimed, provided the income is shown appropriately.

Q. Can co-owners of house property claim tax deductions jointly?

A. You can only claim tax deductions if you are both co-owner and co-borrower in case of joint ownership in the ratio of your respective share in the property. Your name must be on the loan book to request tax benefits under Section 24 of the Income Tax Act.

Q. What is Pre-construction period?

A. “Pre-construction period” means the period commencing on the date of borrowing and ending on March 31 immediately prior to the date of completion of construction/date of acquisition or date of repayment of loan, whichever is earlier.

Q. Is brokerage or commission or paid allowed as deduction under Section 24?

A. No, As a taxpayer, you can claim a 30% deduction (flat) on the net annual value of your house. This deduction is not available in case of self-occupied property.

Q. Is deduction available on the principal amount of home loan?

A. No, only interest portion is allowable as deduction under this section. Under section 80C, maximum deduction of Rs. 150,000 of principal amount of loan is available.

Q. Can we claim deduction of interest paid for 2 house properties owned by the taxpayer?

A. Yes, deduction for interest paid or payable on borrowed capital shall be allowed in respect of 2 self-occupied house properties. However, the aggregate amount of deduction under this provision shall remain same i.e., Rs. 30,000 or Rs. 2, 00,000, as the case may be.

Related Articles:

• Income Tax Slabs FY 2023-24
• Income Tax Calculator
• What is Value Added Tax (VAT)?
• What is an Income Tax Return?
• What is Advance Tax? – Meaning, importance and calculation
• Tax Saving Options for Salaried Employees

ARN – INT/ED/24/8439