Property loans or Home Loans generates interest which seeks the attention of Section 24 of the Income Tax Act, 1961. This section deals with Income from House property and deductions regarding the same. There are 2 types of deduction that Section 24 covers:
- Standard Deduction
- Deduction on Interest generated on loan
Various sections of the Income Tax Act, 1961 covers various investments and expenditures which get tax exemptions under the Act. One of the investment is purchasing the house property (residential property). The house is one of the most integral parts of a person's life, the government recognizing the same exempts the investments for the first house.
For claiming deductions on the tax amount, Section 24 has an important role. It helps in claiming tax exemption on the home loans' interest. Section 80C of Act is another provision which helps in claiming tax benefits while repaying the principal amount of loan.
If the property is on rent or in case there is more than one property, then rent or Net annual value of such other house shall be income from house property. Section 24 of the Act enables a person to claim tax exemptions on income from house property. The tax will be applicable after the deduction under Section 24 of the Act.
Types of Deductions Under Section 24 of the Income Tax Act
Section 24 of the Income Tax Act, 1961 covers two types of Deduction. They are:
The standard deduction is applicable when any person is occupying and owner of only one house. In such condition, 30% amount of the net annual value is available for exemption from the total amount.
Interest on House Loan
If any person obtains a loan for construction or renovation, then, the interest on such a loan can be exempted from the taxation. But, this differs in certain situations. The exemption can be of INR 2,00,000 in case the occupancy rests with the owner himself. One can claim the exemption on interest even before the starting of construction or renovation. 5 equated instalments for interest arising out of the principal amount can be claimed within a year. It is not necessary to pay the creditor before claiming tax exemption. But, the calculation of the tax amount on the interest is important. The only condition for claiming the exemption is that the exemption cannot be claimed before the completion of construction or reconstruction.
Application of Section 24
There are certain circumstances under which the application of Section 24 might differ. These situations are:
- When the occupancy rests with someone else and not by the house owner, then the deduction can be on the whole sum. The upper limit is not applicable in such a scenario.
- Exemption of INR 2 lakh is only possible if the owner of the house lives in a different city due to business purposes.
- The completion of construction or renovation should be within 3 years from the grant of loan. In the event, the renovation or construction goes beyond 3 years then, the limit for exemption within a year is INR 30,000.
Calculation of House Property Income
While the calculation of taxable amount from the loan and its interest is easy, the calculation of income from house property is tedious. For calculating the taxable amount, first, we need to ascertain the income from house property. The following is involved in the process to calculate the income from house property:
- The taxpayer only has the liability to pay tax on the Net Annual Value of the property after standard deduction of 30%. The Net annual value of the house property comes after the deduction of municipal taxes from the Gross Annual Value of the house. The Gross Annual Value of the house is the estimated value of house property without any deductions.
- In the event, the property is lent out to anyone, and the property is vacant, then, income shall be considered only of the month when the property was occupied.
- In case the property is vacant for the entire year; however, the taxpayer is paying municipal taxes then, the taxpayer can offset the loss. The offset of loss can be against the income from other sources, which may include salary or rent from other property. If by any reason whatsoever, the taxpayer fails to offset the loss in the same fiscal year, there is an option of carrying forward. This option enables to carry forward the loss till 8 years from the year of loss.
Other than Section 24, Section 80EE is another provision for claiming an exemption under the Act. This provision enables to claim exemption of INR 50,000 in addition to the deduction under Section 24 of the Act. However, there are conditions for invoking section 80EE. The conditions are:
- Cost of house property shall be less than INR 50 Lakh;
- House Loan shall be less than INR 35 Lakh;
- This is only applicable on the loans sanctioned after April 01, 2016; and
- The house property shall be in the name of the person who obtains the loan.
In the event, the last condition is not met due to the reason of death, and the legal heirs cannot claim any deduction under Section 80EE. However, if the loan is of joint nature, then, the individuals can claim individual tax exemptions. The reason is that the individual person is subject to Section 24 for their respective share in the loan.
Invoking Section 24 of the Income Tax Act 1961, enables an individual to save a good amount of tax and relieves the burden of the taxpayer. The object of Section 24 is to help the taxpayer to construct the house without any further trouble. Even after the construction, the provision helps to claim a certain amount of deduction by recognizing house property as a basic need. In other words, this helping provision is for the benefit of the taxpayer. This is supported by Section 80EE of the Act which helps to claim further deduction on the loan obtained for construction or renovation of house property.