Section 24 of the Income Tax Act, 1961 allows individuals to claim tax exemptions on the interest component of their Home Loans. The maximum deduction limit for the same is Rs. 1,50,000. One does not necessarily have to reside in the property to claim tax deductions. Deductions from income from house property are taken into account under certain circumstances, such as if the property is rented out or if an individual owns multiple properties. Use an Income tax calculator to calculate how much income tax you are liable to pay.
There are 3 main categories of deductions under Section 24 of the Income Tax, as listed below:
1. Standard Deductions
This allows for a 30% deduction on your Net Annual Value. Net Annual Value is Gross Annual Value minus Municipal taxes like property tax, sewerage tax and so on. Where, Gross Annual Value is the higher of expected rent or actual rent received. Naturally, the Net Annual Value of a self-occupied house will be Zero and so will be the Standard Deduction.
2. Deduction on Interest on Housing Loan Under Section 24
Section 24 allows for deduction on the interest component of Home Loan up to Rs 2,00,000 in a financial year. The loan must be used to acquire, construct, repair, renew or reconstruct the property. The property must be acquired within 5 years from the day the loan was availed. The deduction is not applicable on any brokerage or commission paid to any middlemen or agents. The deduction is applicable on self-occupied or vacant properties only. For rented properties, the entire amount of interest is allowed as deduction without limit.
3. Municipal Deduction
One should pay an annual municipal tax to the government which is subtracted from the Gross Annual Value to obtain the property’s Net Annual Value. House owners who have paid the municipal tax in a given financial year can claim a deduction on municipal tax on that year.
Also Read: Know about Income Tax Slabs
Let’s check the important factors you must keep in mind while analysing income from house property:
- Under Section 24 of the Income Tax Act (ITA), house property tax gets calculated on the property’s Net Annual Value. The deductions are done from the property’s Net Annual Value.
- Suppose the house (which is to be considered for computing income) remains vacant for a particular period of the year and then gets let out. Suppose the owner is receiving rent as well. In such a situation, the tax calculation should be done only on the rent received and not for the entire year.
- Let’s use an example to understand this better. Suppose a home is released for 10 months for a rent of Rs.10,000. The property’s gross value will be Rs.1,00,000 (10 months x Rs.10,000). The tax will be calculated on this amount after a regular deduction of 30% and loan interests.
- Now, suppose the taxpayer’s home remains vacant for the entire year and he lives at different places for employment purposes. Suppose he continues to pay municipal taxes. In such a situation, it will be offset against his income from other sources like salary within the same year. If one is not able to offset it, it may get carried over for the next 8 years.
The following table shows the important points of Section 24 of Income Tax Act:
| Particulars | Section 24 of Income Tax Act (ITA) |
|---|---|
| Tax Deduction Allowed | Two main deductions allowed:
|
| Tax Deduction Based on | Increasing basis |
| Tax Deductions Limit | For self-occupied property: ₹2 lakh For non-self-occupied property: No limit |
| Borrowed Capital Can Be Used for | Buying of property, construction, reconstruction, renewal, or repair of property Construction must be completed in 5 years |
| Tax Deduction Can Be Claimed When | Tax deduction can be availed only after renovation and reconstruction is complete |
| Restriction of Sale of Property | Nil |
To claim an income tax deduction of up to ₹ 2,00,000, individuals need to meet the following criteria:
- The Home Loan should be borrowed on or after 1st April 1999 to construct or purchase a housing property.
- The house acquisition or construction occurred within 5 years from the completion of a financial year in which an individual borrowed this loan.
- The borrower owns an interest certificate for the interest payable towards the borrowed fund.
Let us analyse the Home Loan tax benefits in case of a person who repays Home Loan EMIs worth Rs.4 lakh annually, out of which Rs 2 lakh is purely the interest component. This individual has also spent Rs.3 Lakh as interest during pre-construction. Today, they earn Rs.7000 monthly from a let-out property and also pays municipal taxes of Rs 3000 for the house. Let’s calculate their Income from house property in both two scenarios:
1. They have a self-occupied property
2. They have rented-out property
| Type of Property | Self-occupied | Rented out |
|---|---|---|
| Gross annual Value (at 7000 rent) | 0 | Rs.84,000 |
| Less: Municipal taxes | 0 | Rs.3,000 |
| Net Annual Value (NAV) | 0 | Rs.81,000 |
| Standard Deduction(less) | 0 | Rs.24,300 |
| Interest on Home Loan(less) | Rs.2,00,000 | Rs.2,00,000 |
| Pre-construction interest(less) | Rs.60,000 | Rs.60,000 |
| Income from house property | 2,60,000 | Rs.2,03,300 |
| Overall loss limited to | Rs.2,00,000 | Rs.2,00,000 |
Deduction for interest paid on Home Loan for NRIs
NRIs can benefit from tax deductions in the same way as a resident Indian. There are 5 tax benefits related to NRIs availing Home Loan in India as explained below:
- Rs.1,50,000 p.a. – Under section 80C, NRIs can save up to Rs.1,50,000 as deduction, annually on the principal component of the Home Loan.
- Rs.2,00,000 p.a. – Under section 24, NRIs can claim a deduction of Rs.2,00,000 p.a. under the head of ‘Income from house property’.
- Rs.50,000 p.a. – Under section 80EE, NRIs can claim a deduction of Rs.50,000 p.a. on the interest component (Provided the loan amount is under a certain bracket)
- Stamp duty - As per Section 80C, NRIs can also avail deductions for registration charges and stamp duty paid for acquiring their property.
- Pre-construction phase - Section 24 also allows deduction of interest component on NRI Home Loans, even though the property is in pre-construction phase.
Conditions for claiming deductions for NRI Home Loan
In order to claim deduction on NRI Home Loan, the NRI should have at least one source of income in India that is taxable. If so, an NRI is eligible for a deduction of up to Rs.1.5 Lakh on housing loan principal repayment under section 80C and up to Rs.2 Lakh on interest payments if the home is lying vacant.
For a rented-out home, the entire interest payable can be claimed as exemption. In case an NRI returns permanently to India, they can continue enjoying the tax benefits.
Claiming deductions during the pre-construction/pre-repair stage
Income earned from a house property is eligible for some deductions from the total taxable income that include the standard deduction, the deduction for municipal taxes paid, deduction on the interest component of Home Loan and ‘Pre-construction interest’. Such deductions allow a taxpayer to reduce the tax outflow from their taxable income.
Here is a detailed explanation on ‘pre-construction interest’ and how we can claim it.
Pre-construction Interest – It is the interest amount an assessee pays while the residential house is under construction. Deduction on this amount cannot be availed during the construction stage and can only be claimed once the construction is complete.
Conditions for claiming deductions during the pre-construction/pre-repair stage
The section 24 of income tax act allows one to claim the pre-construction interest from the date of borrowing of loan till the 31st of March, before the end of the financial year in which the construction gets completed. Only interest components can be claimed. You can claim the pre-construction interest in 5 equal installments of the 5 years.
Section 24 of Income Tax Act: FAQs
If you and the co-owner of a house meet certain conditions, you can claim tax deductions of up to Rs. 2 Lakh each year. This deduction applies to the interest part of your home loan until the loan is repaid. But remember, both you and the co-owner must live in the house to be eligible for this tax deduction.
Under Section 24(b), if you have a self-occupied property, you can claim a deduction of up to Rs 2 lakh on the interest paid on the home loan. For a property that is let out, you can deduct the entire interest amount.
On the other hand, Section 80EE provides an additional deduction of Rs 50,000. However, this deduction is available only after exhausting the limit of Rs 2 lakh under Section 24(b). In other words, you can claim the additional Rs 50,000 deduction under Section 80EE once you have utilized the maximum limit of Rs 2 lakh under Section 24(b).
Here are the highest deductions you can claim for a housing loan under different sections of the Income Tax Act:
-
Under Section 24(b): You can claim a maximum deduction of up to Rs 2 lakh for the interest paid on a home loan for a self-occupied property.
-
Under Section 80C: You can claim a maximum deduction of up to Rs 1.5 lakh for certain specified investments and expenses, including principal repayment of the home loan.
You can claim both House Rent Allowance (HRA) and tax benefits for a home loan as long as you meet the conditions specified in Section 10(13A), Section 80C, and Section 24(b). If you are paying rent for the house you live in, which you don't own, you can claim the HRA benefit. There is no restriction on claiming HRA while also availing tax benefits for a home loan.
Section 80EE and 80EEA are the provisions in the Income Tax Act introduced to provide an additional deduction for affordable housing loan interest. It aims to support first-time homebuyers purchasing affordable residential properties. However, you cannot claim deductions under both the sections simultaneously.
