Claim Your Dream Home: Exploring Tax Benefits in Section 24 of Income Tax Act 1961

Last Updated : Aug. 8, 2023, 12:42 p.m.

For most of us, having a house is one of our most coveted dreams. But it has been difficult for many individuals to afford homes because of their growing prices. The government provides several crucial benefits under Section 24 of Income Tax Act 1961 to make it easier for everyone who invests in real estate. These benefits include numerous tax discounts for home purchases. This article aims to explain Section 24 and its provisions to help property owners maximise their deductions and enhance their tax planning.

Section 24

Interest paid on loans for homes or other property loans is considered under Section 24 of Income Tax Act of 1961. “Deductions from House Property Income” is also used to describe it. It specifies different deductions that homeowners may claim and provides various provisions for determining taxable income. The maximum tax deduction permitted under this section is Rs. 2 lakhs (per year), and residence in the home is not necessary to receive tax benefits.

Understanding Income from House Property

There are three scenarios in which revenue from house property can occur:

• If a person rents a home, the rent for that home is considered part of their income.
• If a person owns more than one home, the Net Annual Value of every home except the house wherein one lives is included in their income.
• However, the income from a property is regarded as NIL if a person simply owns that residence and lives in it. In this case, all rental income and the annual value of any additional homes are subject to tax after the deductions allowed under Section 24 of Income Tax Act.

Deductions Under House Property

The deductions that may be made under two distinct scenarios are described in Sections 24A and 24B of the Income Tax Act.

The Standard Deduction under Section 24 of Income Tax Act

The standard deduction from income from house property is an income tax deduction granted by Section 24a that is available to all taxpayers. It is a standard deduction of 30% of the Net Annual Value of the rental property. This deduction is still acceptable even if the actual costs associated with the property are more or lower than what is permitted under Section 24 of Income Tax Act. In this way, the deduction is unaffected by costs associated with the property, such as those for energy, water, maintenance, insurance, etc. For a home that is only occupied by the owner, the Annual Value is NIL, and as a result, the standard deduction is similarly NIL.

Deduction of Interest on Home Loan for the property (section 24B)

If you own a home and self-occupy it, you can deduct a maximum of  Rs 2 lakhs from the interest on your loan. If your home is vacant, you can still claim this deduction. However, the entire amount of the loan interest can be deducted if you have rented out your house.

However, if you fail to meet the conditions below, your ability to deduct interest will be limited to Rs 30,000.

• The property should only be purchased and built with the help of the loan;
• Loan application must be  after April 1, 1999;
• Within 5 years of the end of the financial year for which the loan was taken, the purchase or construction, whichever is the case, must be completed.

Municipal tax: The annual sum paid to the local municipal corporation is a municipal tax. Municipal taxes must be subtracted from the gross annual value to get the property’s net annual worth. Municipal taxes may only be deducted if they were borne by the owner and paid within the financial year.

Pre-Construction Interest

You can deduct the pre-construction interest when you have taken out a loan to buy or build a residential property. It is not permitted in the case of a loan for building or maintenance.

Pre-construction interest and housing loan interest combined cannot, under any situation, exceed Rs 2 lakhs per year. Starting from the year the house is bought, or the construction is finished, the deduction for this interest is permitted in 5 equal payments.

Conditions for Claiming Home Loan Interest

To be eligible for this deduction under Section 24 of Income Tax Act, you must fulfil all 3 of the following requirements.

• The loan was for purchase or construction after April 1, 1999.
• The purchase or construction was within five years after the end of the financial year for which the loan was obtained.
• A certificate of interest is offered for the interest that is due on the loan. If these criteria are met, your interest deduction may be restricted to Rs 30,000.
• The loan was taken before April 1, 1999, and it was used to buy, build, repair, or reconstruct for home.

Calculating Income for Home Property

Let’s say someone pays back a house loan of Rs 5 lakh each year, of which Rs 2.5 lakh is interest. Additionally, he paid a 2 lakh rupee pre-construction interest. He receives a rental income of Rs 10000 monthly and must pay Rs 4000 in yearly property taxes. Let’s figure out his income from his home in both cases: He owns a home he lives in himself or rents it out.

Conclusion

The construction of affordable homes has been given top priority by the Indian government under PMAY. To achieve the “Housing for All” goal, there has been progress since last year in developing inexpensive homes for several income categories, including EWS, LIG, and MIG.

Many dream of owning their own homes; fortunately, the government supports this. However, knowing the many tax relief options available to you as a homeowner can greatly aid in improving your tax planning.

Additionally, it impacts budgeting, cash flow, tax liabilities, and taxable income. It is advised that one gets the advice of a tax expert or refers to statutory tax legislation for proper reporting and deduction claims.

FAQs