Section 24 of the Income Tax Act

Section 24 of the Income Tax Act: Know how to compute income from house property 

For most Indians, buying a house is arguably the best long-term investment they can make. After you purchase a home, a big part of your income goes toward paying your home loan EMI. Considering this, the government of India offers some tax breaks under Section 24 of the Income Tax Act to incentivize home buyers and help them save on taxes. Keep reading to know how to compute income from house property.

What is Section 24 of the Income Tax Act?  

Section 24 (b) of the Income Tax Act has a provision that lets people who own their own homes deduct the interest they pay on their housing loans and housing improvement loans from their taxable income. This part is called Deduction from Income from House Property for a reason. Under this section, if you own your own home and pay your interest on a home loan, you can subtract up to Rs. 2 lakh in interest each fiscal year. For people who rent their homes, they can choose to get a tax break on the entire interest on their home loan without any limit. However, the tax deduction is not available for individuals opting for New Tax Regime.

Deductions under house property under Section 24 of the Income Tax Act

Apart from deduction of interest on housing loan (interest on borrowed capital under 24 (b), Section 24 of the Income Tax Act also allows for some other deductions under specific heads. Under Section 24 (a), a person can claim a 30% tax standard deduction on the lowest net annual value of his property or its rental income. However, you cannot avail this benefit if your housing property is self-occupied.  

Tax deduction on rental income

At the very least, you can deduct 30% of your property’s yearly net value or rental income. This is also called a standard deduction, and it lets you pay less in taxes for any property and care costs that a property may have during the year. However, Section 24 (a) of Income Tax Act clearly states that this benefit cannot be availed for homes that are self-occupied by the owner. 

Tax benefit on repayment of home loan

Section 24 (b) of the Income Tax Act allows you to deduct up to Rs. 2 lakh a year on interest paid for your housing loan. It is important to remember, though, that the most tax break you can get relies on how much money you have actually paid back in a year. If you took out a loan to build, buy, rebuild, or renovate a property (housing improvement loan), you are eligible to get a tax break under Section 24 (b) of Income Tax Act.

Pre-construction interest

When you borrow money to buy or build a house, you can deduct the interest you pay on the loan taken during the pre-construction phase. But you can’t claim the rebate for repair or reconstruction. Pre-construction costs should not be more than ₹2 lakh, including the interest on the home loan. The interest deduction can be claimed in five equal installments, starting with the year the house is bought or the building is finished.

What is Income from House Property under the Income Tax Act?

Anyone who legally owns a house has to pay taxes on the money that comes from it. Rental property and property that the owner owns can both be seen as ways to make money from real estate. For the income from a house to be taxed under the heading “Income from House Property,” it must meet the following conditions:

• The person who owns the house should be the assessee.
• The land can be used for anything except by the owner for their own business or job.
• The property should have a house, building, and land.

If the property is a house, its taxed value is equal to its yearly value plus the value of any land that goes with it. The owner pays the tax and also gets the money from the property.

Exceptions under Section 24 of the Income Tax Act

Even if you do not live in the house you own, you can still get a tax break on the housing loan interest you pay. If you live in a different house or rent a home in the city where you work, you can get a tax break on interest payments of up to 2 lakhs. The logic is that the property is still considered self-occupied that qualifies for the tax rebate.

However, brokerage charges paid to get tenants or other charges associated with your housing loan cannot be claimed as deductions. 

It is hard to buy a house, and it is even harder to make mortgage payments for long tenures. People who are buying their first home will appreciate the tax break under Section 24 of the Income Tax Act. Section 24 tax rebate incentivizes buyers to purchase their dream home.

Conditions to claim interest deduction under Section 24(b)

You should meet the following requirements if you want to claim a credit under Section 24 (b) of Income Tax Act:

• The loan must have been availed on or after April 1, 1999.
• The buying process or building project must be finished within five years from the financial year in which you took out the loan.
• The loan should only be used to build or buy a new home.

You need to furnish a proof of interest that indicates how much interest you owe on the housing loan you took out.

Computation of income from house property

In India, figuring out your taxable income requires you to assess how much money you make from your home. Here are some ways on how to go about the process:

• Find out what category of property it is: First, you need to figure out what type of property you have: one that is owned by the person living there, one that is rented out, or one that is thought to be rented out.
• Find the Gross Annual Value (GAV): People who live in their own homes usually don’t have to worry about the GAV when it comes to taxes. For a rental property, find the fair rental value or the actual rent. If you own more than one home and all of them are self-occupied, the GAV is calculated as if that one were leased.
• Net Annual Value (NAV) – The NAV is equal to the GAV minus the local taxes.
• Take the standard deduction – For a rental property, you can subtract 30% of the NAV for costs like repairs, upkeep, and other fees.
• Get a tax break for home loan interest: If you got a loan to buy a house, you can write off the interest you paid on it. For houses that are self-occupied, the most significant deduction that can be taken is currently Rs. 2 lakh on the interest paid. For properties that are rented out or thought to be rented out, there is no upper limit.
• Figure out the income from the house: Take the NAV and take away the standard deduction and the interest on the home loan. This gives you the income from the house.
• Add it to your total income: The last number you got in Step 7 is part of your total pay and is taxed as such.

Points to keep in mind while analyzing income from house property

Here are some things to keep in mind when figuring out how much money you can make from house property:

• 24 (b) of the Income Tax Act, 1961, says that the Net Annual Value of the property is used to calculate the home property tax, and the net annual value of the land is used to determine how much to take away.
• As long as they are not rented out, up to two homes can be called self-occupied.
• Suppose your third house is empty for a specific time of the year, and then rent it out. For this reason, the tax estimate should only be based on the rent paid, not the whole year. ​
• Let us say that the taxpayer’s house is empty for the whole year as he is working in a different city. He pays property tax for the house. In this case, he can offset the tax paid against his salary income, for the same year. More importantly, he can carry forward the offset up to 8 years if he is not able to offset this within the same year.

Applicability of deductions under Section 24

People who own a home that earns rental income or is lived in can claim deductions under Section 24 of the Income Tax Act. There are different kinds of deductions. Basic deduction: Under Section 24 (a), a flat 30% deduction is permitted on the total annual value of the rented property, no matter what expenses were actually incurred.

Section 24 (b) of the Income Tax Act allows homeowners to deduct up to Rs. 2 lakhs on their home loan interest, provided the owner or their family lives in the house. If the house is rented out, the total interest can be deducted without any limit.

Conclusion

Section 24 of the Income Tax Act is important as it helps you assess how much of your income is taxable as it details interest deductions from housing loans and standard deduction applicable for income from rental property. To make sure you’re following the rules for taxes and lowering your tax bill within the legal limits, you need to understand what Section 24 says.