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Taking a Home Loan? Don’t Forget to Understand Section 24

Updated on August 15, 2022 , 6148 views

Indisputably, for almost every other middle-class Indian, purchasing or constructing a home is one of the most common long term investment objectives. However, the skyrocketing prices of the real estate, over the years, have left a majority of them in a position to seek a loan from a financial institute or a Bank.

Section 24

Indeed, when you take a Home Loan, a massive chunk of your Income goes into EMIs. And then, the undeniable fear of missing instalments and the interest shooting up always remains lingering over your head.

Keeping this in mind, the government has come up with certain tax benefits for house property owners covered under section 24 of the income tax Act. Dedicated to it, this post will provide you with a comprehensive information regarding the same.

When ready to claim a Deduction on a home loan, there are a variety of factors that should be kept in mind. Let’s find out the same below.

House Property Income Under Section 24 of Income Tax Act

Income from house property under Sec 24 of income tax is measured in the following scenarios:

  • If the property has been given on rent
  • If there is an annual value of the property, regarded as deemed to be let out, specifically for the income tax purpose (only if you own more than a couple of residential properties)
  • In case the annual income of the self-occupied property is Nil

Deductions for Home Loan Section 24

Standard Deduction

The standard deduction is calculated at 30% of the Gross Annual Value. This deduction amount is permitted even if your real expense on the property is more or less than the given value. Hence, you can effortlessly claim the deduction irrespective of the cost that you may have incurred on your property, such as for electricity, water supply, repairs, insurance, and more.

Keep in mind that since the annual value of a self-occupied property is Nil, the standard deduction will also be the same.

Home Loan Interest Deduction

If you or your family are residing in that property or even if the house is vacant, you are allowed to claim a deduction up to Rs. 2 lakh based on home loan interest. On the other hand, if you have rented out the property, you can claim a deduction on the entire interest of your loan.

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Interest for Pre-Construction of the House

If you have taken a loan for construction or purchase of a residential property, you are eligible to claim deduction on the pre-construction interest. However, note that this will not be allowed if the loan has been issued for the purpose of reconstruction or repair.

In a year, the total deduction amount on pre-construction interest that you can claim should not be more than Rs. 2 lakh.

Terms and Conditions of Sec 24

If you are thinking to claim a deduction, make sure that you fulfil the following conditions:

  • The loan should be disbursed on or after 1st April 1999
  • The purpose of the loan should be the construction or purchase of a residential property
  • The building or acquisition should be done within 5 years from the end of that financial year in which your loan was issued
  • In case the house is not occupied by you or family members, you can claim an exemption for the entire interest paid without any cap limit
  • If the home is vacant and is in another city, while you are residing in some other, you can claim tax exemption on the interest paid only up to Rs. 2 lakh
  • There will be no deduction on commission or brokerage for arranging tenants or a loan
  • A valid interest certificate is required to claim deductions on the disbursed loan

Apart from this, know that the interest deduction can be restricted to Rs. 30,000 in the following scenarios:

  • The loan is issued before 1st April 1999 for construction, purchase, reconstruction, or repair of the house property
  • The loan is issued on or after 1st April 1999 for repair or remodelling of the house property

Computing the Income from a Residential Property

While claiming a deduction on income tax under section 24, understanding the terms related to income from house property can be a bit complex.

Hence, putting it in simple words, here is what you must know about it:

  • Only the Net Annual Value of your property will be regarded for taxation
  • The Annual Net Value can be calculated upon deducting the municipal Taxes paid on the house from the Gross Annual Value of the property
  • If the property is unoccupied for any period in a specific financial year, any sort of income received against the entire 12-month period will not be calculated
  • If the house is vacant and you are earning an income while simultaneously paying the municipal taxes, you can carry forward this loss in the same Fiscal Year or for up to 8 years

In a Nutshell

While taking a home loan seems like a dreadful scenario, deductions allowed under section 24 of the Income Tax Act may prove out to be reassuring.

So, in case you are ready to purchase or construct a residential space, make sure you figure out every taxable aspect associated with the loan you are about to take. After all, that is the only thing that will help you get out of it satisfactorily.

FAQs

1. Is there any tax benefit that you can claim when you take a home loan?

A: Yes, you can claim tax benefit on your regular home loan. You can claim tax benefits up to Rs.1.5 lakh on the principal repayment under Section 80C of the Income Tax Act. Furthermore, you can claim to benefit up to Rs.2 lakh on the interest paid for a single financial year.

2. What is the reason behind tax benefits on a home loan?

A: It induce individuals to take loans instead of purchasing homes by paying directly from their savings. This helps in growing your savings and, at the same time, improves your credit scores. If you take a home loan, it will benefit the Economy; banks and even your savings will be safe.

3. What is the standard deduction of a home loan?

A: The standard deduction on a home loan is 30% of the net annual value. This is applicable irrespective of whether you pay more or less to purchase the property.

4. What is deduction of interest of the home loan property?

A: Under Section 80EE, a taxpayer can claim a deduction up to Rs. 3.5 lakh for a single financial year. However, for this, the loan value cannot exceed Rs. 35 lakh, and the property value cannot be more than Rs. 50 lakh. Moreover, this deduction of interest does not apply to a property that is under construction.

5. What is the minimum rebate you can receive?

A: If you are a first-time buyer, the minimum rebate that you can claim is up to Rs. 50,000 under section 80EE. Although this is an additional benefit, you can claim this rebate irrespective of the kind of house you purchase, as long as it is not under construction.

6. Why do some individuals only receive the minimum rebate?

A: Only the minimum rebate is given to specific individuals if they are not living in the house or co-borrowers. Tax benefits do not apply to homes that are not self-occupied.

7. What are the two most important criteria you must meet to claim interest on home loan?

A: To claim tax benefits on your home loan, you must fall under the given tax slab. You can only claim benefits up to a maximum of Rs. 3.5 lakh. Secondly, you must have all documents in order as to the certificates such as you have taken a loan of the particular value, and you are paying interest on the given value.

8. What is the primary benefit of a joint home loan?

A: When you take a joint home loan, you and your spouse can claim deduction on your IT Returns. However, you and your spouse should be employed separately and have a different source of income. If a house is owned jointly, then both owners can claim deductions up to Rs. 2 lakh on the interest paid on the amount borrowed.

Disclaimer:
All efforts have been made to ensure the information provided here is accurate. However, no guarantees are made regarding correctness of data. Please verify with scheme information document before making any investment.
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