Section 24 of Income Tax Act: Benefits on Home Loan Interest Paid

A property is perceived to have potential to generate income for its owner and thus the government imposes a tax on this 'potential', irrespective of the landlord generating a rental income from it or not.  For the calculation of tax liabilities on account of such properties, authorities decide its annual value. This income also attracts deductions under Section 24 of the Income Tax Act, 1961.

What is Section 24 of the Income Tax Act?

Application

Section 24 offers a flat 30 per cent deduction on net annual value of a property. This is ‘nil’ in the case of self-occupied properties as per the IT Act, irrespective of the payment of municipal tax or not. So, if a buyer purchases a property entirely using his own resources i.e without the assistance of housing finance and is generating income by renting it, he could claim Rs 30 as deduction from every Rs 100 earned. However, if the same property is self-occupied, the owner cannot avail of any deductions under Section 24.

For clarity sake, it is worth mentioning here that  income from house property is taxed on the basis of its net annual value and not on the gross annual value. Net annual value of the property is arrived at by deduction of the tax amount incurred towards paying the municipal body.This section also applies in cases where buyers have used housing finance from a lender to acquire, construct, repair, renew or reconstruct a property.

In such cases, there could be two possible scenarios.

1. If the property is not generating income,(self-acquired or a vacant property), the borrower can claim a deduction of up to Rs 2 lakhs on the home loan interest paid in a financial year under Section 24.
2. In case the property is generating income for the borrower, by means of rental income, the entire home loan interest component is allowed as deduction. This provision is put in place to encourage property owners to let out vacant properties. Government estimates show vacant homes formed 12 per cent of the housing stock in India’s urban markets in 2011.

Section 24: Conditions 

Several conditions have to be fulfilled to claim benefits under this section. In case the loan money is used in construction or purchase of a new property, the borrower can claim Rs 2 lakh as deduction on pre-construction interest in a year in five equal installments at the start of the year, in which the property is constructed or purchased.

There are three basic conditions based on which a borrower can claim deductions under Section 24.

1. They must have taken the loan after April 1, 1999.
2. They should have a certificate from the lenders about the interest calculation.
3. Work must be completed within five years of taking the loan.

For instance, if you are expecting completion of the construction work by FY20, you can claim deduction for the pre-interest you have paid till March 2019 while filing your Income Tax returns in June this year.

“Where the property has been acquired or constructed with borrowed capital, the interest shall be deducted in equal installments for the said previous year and for each of the four immediately succeeding previous years,” reads Section 24. This option is not available if the loan money is used in repairs and improvement. In the latter case, deductions can only be claimed after the repair work has been completed.

The deduction gets restricted to Rs 30,000 in case the house is not constructed within five years of taking the loan. This period starts from the end of the financial year in which the loan was taken.

In case the borrower has paid more than Rs 2 lakhs as interest, they have the option to carry their additional expense forward for another three years to set off the losses. This option is, however, open to only those who are generating income from the house property. 

Under Section 80C, tax deduction on the principal component of housing loans is offered on a payment basis. The same is not true of Section 24, under which deductions are offered on accrual basis. This means, interest would be calculated for each year separately and deductions can be claimed even if no actual payment has been made.