Section 24 (B) : Deductions From House Property Income
Owning a home is one of the most desirable wishes for most of us. But given the skyrocketing prices of houses in the metros and even in Tier-II cities, it has become increasingly difficult for people to afford them.
Therefore, the government has developed several critical benefits under Section 24b of Income Tax Act 1961 to grant relief through various tax breaks for buying a house to reward anyone who invests in real estate.
This article covers all the provisions under section 24 B that can help you lower your tax liability as a homeowner. Read on.
Understanding Income from House Property
There are three possible scenarios wherein income from house property can occur-
- Housing income by way of rent;
- The annual value of the property which is considered “deemed to be let out” for income tax purposes (This occurs when we own more than one property);
- The annual value of the property which is self-occupied;
The Gross Annual Value differs in all three cases, as shown below:-
|
Situation |
Gross Annual Value (GAV) |
|
Self-Occupied |
Nil |
|
Property let out for rent |
Rent received (Annual Value is less municipal taxes paid, i.e. Annual Value = Gross Annual Value minus municipal taxes paid to local authorities) |
|
Deemed to be let out |
Reasonable rent of a similar place/ locality is to be considered |
What Are The Deductions That Can Be Claimed Under House Property?
You can claim certain deductions and get and reduce your tax outgo if you have income from house property.
-
Municipal Tax
Municipal taxes are the annual amounts paid to the local municipal corporation. Municipal taxes must be reduced from the Gross Annual Value of the dwelling property to get the Net Annual Value.
Therefore, municipal taxes can only be deducted if the property owner pays during that fiscal year.
-
Standard Deduction
A standard deduction rate of 30% is applicable on the Net Annual Value of the property. The best part about this deduction is that it is allowed even when the actual expenditure on the property is higher or lower.
The average costs may include insurance, repairs, electricity, water supply, etc. An important point to remember here is that as the Annual Value of a self-occupied house is nil, the standard deduction applicable is also nil.
-
Deduction On The Interest Part Of The Home Loan Undertaken
As a homeowner, you can claim a deduction of up to INR 2 lakh on your home loan's interest if you are self-occupying the house.
You can also claim this deduction if your house is vacant. However, if you have let out your property, the entire interest on the home loan can be claimed as a deduction.
However, there are specific criteria you must meet else the deduction on interest will be limited to Rs 30,000:-
- The home loan taken should only be for the purchase and construction of the property;
- The loan must be taken on or after 1st April 1999;
- The purchase or the construction, whichever be the case for which the home loan is undertaken, should be completed within five years from the end of the financial year the loan was taken.
Apart from the conditions mentioned above, it would be best to remember that an interest certificate is necessary to claim a deduction for the interest payable.
Understanding Pre-Construction Interest
A benefit of pre-construction interest arises when you take a home loan for purchasing or construction.
Two critical points for you to remember before claiming this interest are:-
- It cannot be claimed for a loan taken for repairs or reconstruction of the house;
- The pre-construction and interest on housing loans that can be claimed for a particular year cannot exceed Rs 2 lakhs.
Also, it would be best if you remembered that the interest is allowed in five equal instalments starting from the year the house is purchased or the construction is completed. Let us understand this with the help of an example.
If the construction of our home gets completed on 15th September 2022 (FY 2022-23), then we are eligible to claim a deduction accruing to 1/5th of the interest paid till 31st March 2022 while filing our tax returns for the FY 2022-23.
How Is Income From House Property Calculated
Consider a person who is repaying a home loan. The total amount paid in a particular year amounts to INR 5 lakhs, of which INR 2.3 lakhs is the interest component. In addition, the person has also incurred a pre-construction interest of INR 2 lakhs.
To understand the scenario better, let us take another example wherein the homeowner earns Rs 10000 monthly from a let-out property and pays municipal taxes to the tune of Rs 4000 annually.
Let us now calculate the Income from House Property under both scenarios:
- In the case of self-occupied (I);
- In case the property is let out (II)
|
Type of House Property |
Self-Occupied (I) |
Let Out property (II) |
|
Gross annual value (Rent received – 10000*12) |
NIL |
120,000 |
|
Less: Municipal taxes paid to the local authorities |
NIL |
4000 |
|
Net Annual Value (NAV) |
NIL |
116,000 |
|
Less: Standard deduction (@30% of NAV) |
NIL |
34,800 |
|
Less: Interest paid on Home Loan |
230,000 |
230,000 |
|
Less: Pre-construction interest (1/5th of INR 2 lakhs) |
40,000 |
40,000 |
|
Income from House Property |
(270,000) |
(351,200) |
|
Total interest claim for the year |
200,000 |
200,000 |
Summing Up Section 24(b) of Income Tax Act
The Indian government has prioritised the development of inexpensive housing under PMAY. Since last year, there has been progress in developing affordable homes for various income categories, including EWS, LIG, and MIG, to fulfil the "Housing for All" target.
Buying your own house is a dream for many; thankfully, the government encourages it. However, being aware of the various provisions under which you can get tax relief as a house owner can go a long way in helping you plan your taxes better.
One must understand all kinds of income tax benefits related to housing under the 24b deduction section. For example, understanding home property income deductions is essential for tax savings, adhering to tax regulations, optimising tax planning, managing money, and avoiding errors/penalties.
Additionally, it affects taxable income, tax liabilities, cash flow, and budgeting. For appropriate reporting and deduction claims, it is suggested that one must consult a tax professional or refer to statutory tax legislation.
Disclaimer: This blog is solely for educational purposes.