7 Mins

Owning your own house is a dream that many Indians wish to fulfill. With property rates rising rapidly, it becomes difficult to buy a house without a home loan. It is quite hassle-free to a home loan from a banking or financial institution. But the loan comes with a heavy EMI. Usually, the EMI is heavy on interest and low on the principal amount. 

The government of India understands the pain of an individual and hence provides a tax benefit against the interest and principal amount. Section 24 of income tax act deals with such tax benefits or deductions for interest on the home loans. 

Deductions Under Section 24 Of Income Tax Act

Standard Deduction

A standard deduction of 30% is allowed to the taxpayers on the net annual value. This deduction is by default not applicable to self-occupied house property. Since the net annual value is nil for a self-occupied property the standard deduction is also nil. 

Interest on Home Loan

Section 24 provides for deduction for interest on a home loan of up to Rs 2,00,000 in a financial year. The assessee can claim a deduction up to Rs 2 lakh vehicle computing his/ her total taxable income under the head of house property. The loan must be taken to acquire, construct, repair, renew or reconstruct the property. However, the deduction is not available on any brokerage or commission an assessee pays to any middlemen or agents. An assessee must calculate the total interest paid payable under each EMI and then claim the tax benefit. 

Conditions for Claiming Interest on Home Loan

The following conditions must be met to claim the deduction under section 24 of the income tax act:

Deduction up to Rs 2,00,000 Under Section 24 Of Income Tax Act

  1. The taxpayer must acquire, construct, repair, renew or reconstruct the property with borrowed capital
  2. The loan is taken on or after the 1st day of April 1999
  3. Such acquisition or construction is completed within five years from the end of the financial year in which capital was borrowed
  4. The assessee needs to submit a certificate from the person to whom any interest is payable on the capital borrowed. Here this person can be a financial institution or a banking company. In any case, the certificate must specify the amount of interest payable by the assessee for the purpose of acquisition or construction of the house property. Obtaining this certificate is not a tough task. Usually, the financial institution or a banking company provides this certificate annually and at the start of the loan period. 
  5. The house property is either self-occupied or is vacant. In the case where the property is rented out, the entire amount of interest is allowed as a deduction without any limit

Deduction Of Rs 30,000 Under Section 24 Of Income Tax Act

  1. In case a taxpayer fails to satisfy any of the above conditions, he/ she can claim only Rs 30.000 as a deduction u/s 24
  2. The loan is taken on or before the 1st day of April 1999 to acquire, construct, repair, renew or reconstruct the property with borrowed capital

Deduction For Pre Construction Interest u/s 24

Till now we have seen the income tax department allows deduction against an already constructed or purchased house property. This implies deduction for an interest post-construction or purchase of a house property. However, an assessee also incurs interest cost during the period of construction or purchase which is known as pre-construction interest. 

Section 24 of the income tax act provides for deduction on pre-construction as well as post-construction interest.

The below conditions apply:

  1. The total deduction against pre-construction interest is limited to Rs 2 lakh just like post-construction interest
  2. If the loan is taken for repair or reconstruction then the deduction is not available
  3. The deduction is available in 5 equal installments for each financial year. The first installment is available in the year in which the house is purchased or construction is completed. 
  4. Example- Mr. Arun takes a loan to construct a new house. During the pre-construction period, he has paid a total interest of Rs 6 lakh. The construction is over on 5th May 2019. He can claim the total Rs 6 lakh interest in 5 installments. Every year he can claim Rs 1,20,000. The first claim he can take in the financial year 2019-20 and then claim for the next 4 financial years.  

Exceptions Under Section 24 Of Income Tax Act

  1. No deduction against any commission or brokerage. However to arrive at the net annual value of the property you can deduct municipal taxes from the gross value.
  2. The assessee must possess a certificate of interest against the home loan
  3. If the house is not occupied by the owner the there is no upper limit on the amount of tax deduction. 

Section 24 and Section 80EE Of Income Tax Act

While calculating the total income an assessee can claim a tax deduction against interest payable on the loan. 

However, the following conditions apply:

  1. The home loan is taken to purchase a house property for residential purpose only
  2. The loan is taken by him/ her from any financial institution for the purpose of acquisition of a residential property.
  3. The loan must be sanctioned between the period beginning from 1st April 2016 and ending on 31st March 2017
  4. As on the sanction date, the taxpayer must own any other house property
  5. The loan sanction amount is less than Rs 35 lakh to acquire a residential house property
  6. The Total value of the house property is less than Rs 50 lakh

An assessee can claim tax deduction under both the section. All you need to do is satisfy the conditions under both the section. First claim tax benefit under section 24 up to Rs 2 lakh. Further, claim the next Rs 50,000 of interest on home loan under section 80EE. This way you can ensure you claim a total of Rs 2,50,000 against interest 

Income from House Property

A taxpayer can earn income from house property in the following cases:

The income from house property is calculated as follows:

ParticularsAmount
Gross annual ValueXXX
Less: Municipal Taxes or Taxes paid to local authoritiesXXX
Net Annual Value (NAV)XXX
Less: Standard Deduction (30% of NAV)XXX
Less: Interest on Housing LoanXXX
Less: Pre-construction interestXXX
Income from House PropertyXXX
Income From House PropertyScenarioAmount of Income
Rental IncomeThe taxpayer receives rental income from the tenant against a let out propertyRental amount per month excluding any maintenance charges.
Deemed to be let outThe taxpayer owns more than 2 house propertiesGross Annual Value(deemed income)
Self OccupiedTaxpayer is living in the houseNIL

What is Gross Annual Value ?

The annual value of the property will be calculated as follows:

  1. A sum of rental income that the assessee expect to receive year on year will be the gross annual value. This calculation is usually used for deemed let out property
  2. The property may let out the property during the financial year. The assessee receives rental income less than the amount specified in point (1). In such a case the actual amount of rental income received will be the gross annual value of the property.
  3. The property may let out the property during the financial year. The property was vacant for whole financial year or a part of the financial year. Owing to such vacancy the actual rent received or receivable by the owner is less than the amount specified in point (1). In such a case the actual amount of rental income received will be the gross annual value.

Illustration on Income Under The Head House Property

Mr. Arun has taken a loan from a financial institution. He pays an EMI of Rs 36000 per month. 

Case-1 He lives in the house i.e. the property is self-occupied by him. The total EMI paid in the financial year is Rs Rs 4,32,000. Interest paid is Rs 264000 and the principal amount is Rs 1,68,000. The pre-construction interest is Rs 3,00,000. Hence, the pre-construction interest every financial year is Rs 60,000

Case-2 He has let out his property for Rs 40,000 per month. 

ParticularsSelf- OccupiedLet-Out
Gross Annual ValueNIL4,80,000
Less: Municipal Taxes or Taxes paid to local authoritiesNA10,000
Net Annual Value (NAV)NIL4,70,000
Less: Standard Deduction (30% of NAV)NA1,41,000
Less: Interest on Housing Loan2,00,0002,64,000
Less: Pre-construction interest60,00060,000
Income from House Property(2,60,000)5,000
Loss(2,00,000)

It is to be noted that an assessee can set-off a maximum loss in a financial year is limited to Rs 2,00,000. The remaining loss can be carried forward to future years – 8 years in total. However, in these 8 years, it can only be set off from income from house property.