Section 24 of the Income Tax Act 1961

Buying a house has become a challenge these days with the prices of the houses soaring high. It is absolutely impossible to buy a house without going in for a Home Loan. A Home Loan will result in a heavy monetary burden in the form of equated monthly instalments (EMI) since a large chunk of your income will go towards the EMI. To ease the monetary burden to some extent, the Government has introduced some benefit on the house property through Section 24 of the Income Tax Act 1961.

Income from House Property

The amount of tax benefit you get on the house property depends on the income from the house property.

The method of calculating the income from house property is as follows:

  • If you are the owner of more than one property, it is presumed that there is an income by way of rent for one of the properties. In case the family members or the owner of the property is occupying the house, then there is no income from the house. If the house is kept vacant for some reasons, then the rent as per the prevailing market rate will be considered to arrive at the annual income from the property.
  • The income you make out the house property by way of rent is considered. The rent earned for a year is the Gross Annual Value (GAV). The tax you pay on the property will be deducted from the GAV to arrive at the Net Annual Value.
  • If the house is occupied by the owner or his family, then the annual income from that house will be zero.

Deductions under Section 24 of the Income Tax Act 1961

Standard Deduction

30% of the Net Asset Value (NAV) of the property is allowed as a standard deduction under Section 24 of the Income Tax Act. This does not depend on the expenses incurred towards the house. It is irrespective of whether the expenses incurred are more than the NAV or lesser than the NAV. You might have incurred heavy expenses for insurance, repairs, water supply, electricity, etc. towards the house. These will not be considered. Only the NAV will be considered.

It the house property is used by the owner as their residence or residence for their family, then the NAV will be nil.

Deduction of Interest on the Home Loan of the Property

There are deductions allowed in interest on the Home Loan of the property under Section 24 of the Income Tax Act.

  • Taxpayers can claim a deduction on Home Loan interest up to 2 Lakhs if the house is the residence of the owner of the property or the family of the owner. The same will be the case if the house remains unoccupied either by the owner, their family or a tenant.
  • If the house is rented out, then a deduction can be claimed on the entire interest paid on the Home Loan.
  • The deduction is permitted only to the extent of 30,000 on the Home Loan interest if the following conditions are not complied with:
    • The loan should be used only for the purchase of a building/flat or construction of a building
    • The loan must have been availed after April 1999
    • The construction of the house or the purchase formalities of the house should be completed with 5 years from the date of the financial year when the loan was availed.

Pre-EMI Interest of Pre-Construction Interest

The housing loan availed has to be repaid in EMIs that consist of both the interest and the principal component. The demand for the EMI begins only after the entire loan amount is disbursed. When the construction is in progress, the loan amount is disbursed in stages. The interest accrued on this partially disbursed amount is the pre-EMI interest or the pre-construction interest. The deduction on this pre-EMI interest can be claimed only after the construction is completed. The pre-EMI interest along with the interest on the house loan should not exceed 2 Lakhs in a financial year. The deduction on the pre-EMI interest can be claimed in 5 instalments. The instalments begin from the year when the project was completed. During the pre-construction period, the principal amount voluntarily paid will not be considered for deduction. Only the pre-EMI will be considered.

Conditions for Claiming Deduction on Interest for a Home Loan

The following conditions have to be met with for claiming deduction on interest for a Home Loan:

  • The loan should have been availed after April 1999
  • The house construction of the purchase formalities should have been completed within 5 years from the date of the financial year when the loan was availed.
  • The interest certificate should be available for the deduction

The interest deduction will be limited to 30,000 if anyone of the above conditions is not met with.

Computation of Income from House Property

The computation of income from house property is illustrated below citing an example:

Mr. X has availed a Home Loan for construction of a house property. He repays an amount of 6 Lakhs yearly towards the Home Loan out of which the interest is 3.50 Lakhs. He is earning a rent of 10,000 from the house property. The pre-EMI interest he has paid is 1.50 Lakhs. He pays a property tax of 5,000. With the data available, the calculation of income from the house property is done as given below:

The income is calculated in both the cases, i.e., when Mr. X is using the house as his residence or when he has rented out:

Property Type Rented Self-occupied

Gross Annual Value

1,20,000

Nil

Less Property Tax

5,000

NA

Net Asset Value

1,15,000   

Nil

Less: Standard Deduction-30% of NAV

34,500

NA

Less: Housing loan interest

2,00,000

2,00,000

Less: Pre-EMI interest (1/5th of 1,50,000)

30,000

30,000

Income from house property

1,49,500

2,30,000

Overall loss restricted to

1,49,500

2,00,000

A set off up to a maximum of 2,00,000 in a financial year is allowed. The remaining loss is allowed to be carried over for a period of 8 years. The set-off is allowed only against income from house property.

FAQs - Section 24 of the Income Tax Act 1961

Presume that a tenant sub-lets the house. Is this income deductable under the "Income from house property?

Any direct income to the owner of the house is deductible under the head "income from house property."  Any income that comes to any other person other than the owner of the property cannot be treated as income from house property. However, it can be deducted under the head "income from other sources."

How will the income that is received from a person other than the owner of the property treated in terms of deduction under the head "income from house property"?

Any income which is directly not received by the owner cannot be treated as income from house property. However, in some cases where the person is considered as deemed owner the deduction under 'income from house property' will be considered.

  • If the property is transferred to spouse or minor children without any exchange of money, then the transferor is considered as the deemed owner.
  • If a property is jointly held, but the partition has not been made, then the person in whose name the property is held is considered as the deemed owner of the property.
  • A co-operative society member who has received the property vide an allotment under a scheme of the society, association, or a company will be considered as the deemed owner of the property.
  • If a person obtains property by virtue of complying with the conditions as per Section 53A of the Transfer of Property Act, he/she will be considered as the deemed owner of the property. The conditions under Section 53A are:
    • A written agreement should be available
    • The person has paid the amount or will pay the amount
    • The buyer has acquired possession of the property based on the agreement
    • In case the property is taken on lease for a period over 12 years, the person who has taken the property on the lease will be considered as the deemed owner of the property.

If the letting out a house comprises of rent and charges for other services like security, water, lift, etc., what would be the tax treatment?

In such a case, the part of the amount that is paid for the usage of the property and the services acquired will be bifurcated. The income from the usage of the property will be charged under the head 'income from house property,' and the income from other services will be charged under the head 'income from other business/profession.'

How to calculate the gross annual value for a property which was lying vacant for some month of the year?

The income for the months when the house was given on rent only will be considered to arrive at the gross annual value.

What are the charges allowed to be deducted while computing the amount chargeable to tax from the income of house property?

The following charges are allowed to be deducted from the annual gross value to arrive at the taxable income:

  • The property tax paid for the property
  • Standard deduction at 30% of the NAV
  • Interest paid on the Home Loan

Property tax is allowed for deduction only if the tax is paid.

Is interest paid on loan availed from friends, relatives, permitted for deduction while calculating "income from house property"?

If the loan availed is utilised for the purpose of remodelling, extension and repair of the house, it can be considered for deduction while computing "income from house property."

Does the personal loan availed from lending institutions have tax benefit under Section 24 of the Income Tax Act?

Yes. If the personal loan availed is used for repair, reconstruction or remodelling of the existing house, then the interest paid on the personal loan is eligible for deduction under Section 24 of the Income Tax Act.

What is the tax treatment in case of arrears of rent?

The arrears received in the subsequent years will be taxable during the year which It was received after deducting 30% of the amount. Such amount will be taxable to the taxpayer even if he is not the owner of the property during the year the arrears were received.

What is the procedure for computation of income from a property which is partly used as residence by the owner of the property and partly rented out?

For the portion of the property, which is used for residence by the owner, the calculation will be in the same way as computed for a self-occupied property and so the GAV for that portion will be zero. The other portion of the property that is rented out, the computation will be similar to the property that is rented out and the GAV will be the annual rent received for that portion.

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