written by Khatabook | August 16, 2021

Deductions from House Property Income– Section 24

If you’re curious about house properties and how income tax is deducted from them, you’ve come to the right place. The first thing to know is what aspects are categorised under house properties. Your home, office, a store, some building, or some premise belonging to the building, such as a parking lot, are all examples of house properties. There is no distinction between a business and a residential property under the Income Tax Act. In the income tax return, all sorts of properties are liable to tax under the heading "income from residential property." For example, under standard deductions, if the house owner(s) or their family lives in a certain residence, a deduction of  Rs 2 lakh on their home loan interest is maintained.

The given income is taxable under the Income Tax Act of 1961 under the heading "Income from House Property":

  • Rental income on a rented property
  • A property's annual value is deemed let out property (a taxpayer who owns more than two houses where the first two properties are treated as self-occupied where the third property is let out)  for income tax reasons
  • A self-occupied property which has no annual value.

What is Income from House Property

The annual value of a self-occupied property is zero or even negative if the home loan interest is being paid. If you rent out the property, the rent you earn is your Gross Annual Value. Reasonable rent of a similar place is your Gross Annual Value for a property considered to be hired out. 

What is Section 24?

The amount of interest payable by an individual on a house or property loan is dealt with in Section 24 of the Income Tax Act. Loan interest and the standard deduction are both potential deductions.

The Income Tax Act 1961 contains various sections that permit you to receive tax exemptions on specified investments and expenditures. Purchase of residential property is one investment that is frequently emphasised in the Act.  The government recognises housing as a critical need and asset, and many investments toward your first house are tax-free.

Section 24 of the tax code, which deals with home loans, is particularly essential since it permits you to claim interest exemptions. In a different section, Section 80C lets you claim tax benefits on principal repayment.

“Deductions from income from residential property” or deduction u/s 24b is the title of Section 24. The term "income from house property" can be used in the following situations:

  • If you rent out your home(s), the rent you receive will be included in your income; 
  • If you own more than one home, the Annual Net Value of all of your homes, except the one you live in, will be included in your income. In this context, Annual Net Value can be identified to be the estimated rent as per property value on a yearly basis. This takes into consideration of the insurance, repairs and other expenses are done by the tenant for property maintenance.   
  • If you own only one house and live in it, the income from house property is deemed to be zero. After deductions under Section 24, any income obtained from rent and the annual value of extra dwellings will be liable to tax.
  • If the cost of the residence is less than Rs.50 lakh and the loan taken is less than Rs 35 lakh, Section 80EE permits an extra exemption of Rs 50,000. This provision will only be accessible starting in the fiscal year 2020-21. 

It's worth noting that these tax breaks are only available to the person on whose name the house and loans are registered. If a person dies and the property and loan obligations are passed on to an heir, the heir is not eligible for any tax benefits. If you took a joint loan or owned property with another person, in that case, all parties who are repaying the loan and owning the property can claim individual deductions because Section 24 applies to each individual, not each property.

Deductions Under House Property

Standard Deduction-  It is an exemption available to all taxpayers in which a sum equivalent to 30% of the net annual value is free from the tax limit. It does not apply, however, if you are the sole owner of your home. The rate of the standard deduction is 30% of those mentioned above Annual Net Value. A 30% deduction is granted regardless of whether your real property costs are relatively high or low. As a result, this deduction is made irrespective of any actual expenses you may have suffered for insurance, repairs, energy, or water supply, among other things. Because the Annual Value of a self-occupied dwelling property is 0, the standard deduction becomes zero.

If the owner or their family lives in residence, they can deduct up to Rs 2 lakh on their home loan interest. Even if the residence is empty, the same loan interest is applied. The entire interest on the house loan might be deducted if the property has been rented out. If you don't meet any of these conditions for the 2 lakh rupees rebate, your interest deduction is restricted to Rs 30,000:

  • The house loan must be used to purchase and develop a house
  • The loan must be accepted on or after April 1, 1999
  • The acquisition or construction work must be completed within 5 years of the loan's inception.

Municipal tax- The annual sum paid to the municipal corporation of an area is known as municipal tax. To calculate the Annual Net Value of the residential property, subtract municipal taxes from the Gross Annual Value. Municipal taxes can only be deducted if they were paid and borne by the owner during that fiscal year.

Also Read: Understanding Income Tax Allowances and Allowed Deductions for Salaried Individuals

Pre-Construction Interest

You can deduct interest on pre-construction if you took out a loan for the construction or purchase of a home. This is not permitted, however, in the case of a loan for reconstructions or repairs. 

In any case, the total amount of pre-construction interest and housing loan interest allowed to be claimed in a year should not exceed 2 lakh rupees. This interest is deducted in five equal instalments beginning in the year the house is acquired, or the construction is finished.

  • For example, if your property was finished in FY 2018-19 on June 25th, 2018, you can claim 1/5th of the interest paid until March 31st, 2019, when you file your FY 2018-19 return.

Conditions for Claim of Home Loan Interest

To claim this deduction, you must meet all three conditions listed below.

  1. The loan was obtained after April 1st 1999, for purchase or building.
  2. The acquisition or construction is completed within 5 years (3 years till FY 2015-16) of the end of the financial year in which the loan was received.
  3. For the interest due on loan, there is an interest certificate available. 

If any of these conditions are met, your interest deduction may be limited to Rs 30,000-

  • The loan was taken before April 1st 1999, for purchasing, constructing, repairing, or reconstructing a home or/and
  • The loan was taken on or after April 1st 1999, and the loan was taken for purchasing, constructing, repairing, or reconstructing a home as per Section 24.

Let's understand Home Loan interest aspects through an example:

Mr Z owns three houses- two are self-occupied and one is available for rent. The interest on a home loan for both self-occupied and rented homes is Rs 3.00 lakhs, while the interest on a rent-out property is Rs 2.5 lakhs. What are the many types of deductions he can claim for his house property income?

Self-occupied properties:

  • Mr Z can now claim two properties as self-occupied properties with an annual value of Nil, thanks to a Budget 2019 adjustment. Before 2019, only one property could be claimed as self-occupied, and the second property's notional rent was taxed.
  • Mr Z can deduct up to Rs. 2.00 lakh from his total deduction (for both self-occupied homes) for Rs 3 lakhs which is the actual home loan interest paid.
  • House property income will become negative after claiming home loan interest because the annual worth of self-occupied properties is nil. This negative sum might be deducted from other current-year revenue. 
  • In addition, the loss can be carried forward for the next eight years and offset solely against future residential property income.

Rented properties

  • Actual rent received or receivable will be considered a "Gross yearly value" in the event of the rented property.
  • Municipal taxes paid, genuine interest on a housing loan (no ceiling restriction for claiming interest on a let-out property), and other deductions will be allowed. Mr Z can deduct the actual house loan interest paid of Rs 2.5 lakhs for the rented property.
  • Mr Z can additionally claim income from house property deductions of up to Rs 1.5 lakh under section 80C for principal repayments, which will be the total of all house loan instalments.
  • Furthermore, if Mr Z chooses a ‘New tax regime' for FY 2020-21, the deduction for house loan interest and the 80C deduction for repayment of the principal amount of the loan will be ineligible.

Computation of Income Under House Property

For tax purposes, only the Net Annual Value of your home(s) is considered. When you subtract the municipal taxes paid on the property from the gross yearly value of the residence, you get the net annual value. 

  • For example, if you receive Rs 1.2 lakh in rent on the house you've rented out each year and pay Rs 40,000 in municipal taxes, your house's Net Annual Value is Rs 80,000, and you only have to pay tax on this amount.

If your house(s) is vacant for any period during the financial year owing to a lack of tenants, you must only count the rent income received and not the total income for the year.

  • For example, if a house that rents for Rs 17,000 is vacant for four months during the fiscal year, the gross value of the house will be Rs 1,36,000 (Rs 17,000 * eight). After deducting the amount of municipal taxes paid and the usual deduction of 30%, the tax payable on this income will be computed.

If your house(s) are vacant and not providing you with any revenue, but you are still paying municipal taxes, you can balance this loss against income from other sources during the same fiscal year, such as your salary or rent from another property. You can carry forward a loss for up to 8 years if you cannot offset it in the same year.

  • Assume a person pays back a house loan of Rs 4 lakh per year, of which the interest is rupees 2 lakh. In addition, he owes Rs 3 lakh in pre-construction interest. He earns Rs 7000 per month from a rented property and pays Rs 3000 in municipal taxes on the property. Let's see how much money he makes from his residence in both scenarios: 

1. He owns a home that he lives in, 2, from the rented property.

Type of House Property

Self Occupied

Let Out

Gross annual Value (Rent paid- 7000*12)

NIL

84,000

Less: Municipal Taxes or Taxes paid to local authorities

NA

3,000

Net Annual Value(NAV)

Nil

81,000

Less: Standard Deduction(30% of NAV)

NA

24,300

Less: Interest on Housing Loan

200,000

200,000

Less: Pre-construction interest (1/5th of 3 Lakhs)

60,000

60,000

Income from House Property

(260,000)

(203,300)

Overall loss restricted to

(200,000)

(200,000)

Keep in mind that the maximum loss set-off allowed in a fiscal year is 2 lakh rupees. The loss that remains can be carried forward for a total of eight years. However, it is only deductible from income from dwelling property during these eight years.

Relief For Homeowners: Key Budgetary Announcements

  • We are all aware that the government has promoted affordable housing and aspires to achieve Housing for All by 2022.
  • The government granted additional relief of INR 1.5 lakhs to purchase a house up to INR 45 lakhs in the most recent budget unveiled by Finance Minister Mrs Nirmala Sitharaman to provide a boost to this existing scheme.
  • As a result, those hoping to purchase a home through the affordable housing scheme would greatly profit from this provision.

Points to remember

  • There is no income tax benefit for commissions or brokerage fees paid to intermediate agents.
  • If the taxpayer does not live in the house, they can claim exemptions on the total amount of interest owed, with no maximum limit.
  • To be eligible for the maximum deduction, a homeowner must acquire after the complete construction of the entire property.

Also Read: Income Tax Rebate Under Section 87A

Conclusion 

For many people, owning a home is a dream. However, there are certain rules and regulations that an individual needs to follow in order to maintain their house property such as paying taxes. Understanding Section 24 and income from house property along with its various rules and regulations can help you receive tax relief. You can generate income from your property by renting it out or on its transfer which would be categorised as income from house property. Learning about income from house property deductions are integral as well. Thus, as a homeowner, you can manage your taxes for House Property by learning and understanding how these taxes work. You can refer to Khatabook for more information so that you can do better planning for your taxes.

FAQs

1. Is rental income from subletting taxable under the “Income from House Property” heading? 

Rental income is taxed in the owner's hands under the heading "Income from House Property." Other than the owner's rental income, a person cannot be taxed under the heading "Income from house property" if they are not the actual owner of the house. Such earnings are taxable as "Income from other sources" or "Profits and Gains from Business or Profession," from the house owner depending on the situation. 

2. What is the tax treatment of composite rent in terms of property let out?

Composite rent is the building's rent and costs for other services (such as lifts, security guards, and water supply). The sum related to the use of the property will be charged to tax under "Income from house property," and charges for various services will be charged to tax under the heading "Profits and gains of business and profession" or "Income from other sources" in this instance (as the case may be). 

3. What is the total amount of pre-construction and housing loan interest?

The loan interest allowed to be claimed in a year should not exceed 2 lakh rupees in regards to the total amount of the property. 

4. What is the maximum loan interest that can be deducted on a property?

A deduction u/s 24 up to Rs 2 lakh is allowed on home loan interest, either if the house owner lives in the residence or if it’s vacant. However, if the property is rented out, then the full interest on the house loan may be deducted

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