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Chapter 6 Income from House Property and deductions under Section 24

When an individual purchases a property, there are several possibilities. Either one could stay in the property, in which case it will be classified as Self-Occupied property or one could let out the property, in which case the rent received on the property will have to show as income under the category of rental income. However, in both the cases, Section 24 of the Income Act permits one to claim exemption for the interest paid on home loan taken to purchase the property. This home loan can be taken from any eligible lender. Remember, only the interest component of your EMI is eligible for this benefit and the principal portion will be deductible under Section 80C of the Income Tax Act.

Understanding the nuances of Income from House property…

When an assessee earns any income from house property, it is taxed under the head “Income from house property” as per the Income Tax Act. Tax calculation on such income varies depending on the type of house property and other factors.

Illustration 1

The table given below shows how you can calculate Income from House Property:

Calculation of Income from House Property Amount
Gross Annual Value Rs.500,000
Deduct: Municipal Taxes paid Rs.10,000
Net Annual Value Rs.490,000
Deduct: Exemption for interest on property loan u/s 24 of the IT Act Rs.1,35,000
Taxable Income from Property Rs.3,55,000

When calculating the income from house property, in case you hold multiple properties, the total of income from all those properties will be treated as income from house property and added to your total income. Now, the question is what happens in case of self-occupied property. It’s simple: you just take the gross annual value (GAV) as Rs.0. Then, the interest amount of Rs.1,35,000 is fully deductible (if it falls within Rs.2 lakhs), and you can show your income from property as (-Rs.135,000) a loss on house property that can be written off against your total income and your taxable income can be reduced proportionately.

Thus, if the income under the head “house property” is negative (loss), you can offset that loss against your other taxable income including salary. However, Budget 2017 has put a cap of Rs.2 lakh on loss from house property, which can be adjusted against income from other heads in a financial year. This implies that starting 2017-18, you will be able to offset a maximum Rs.2 lakh loss on house property against your other income, and the balance can be carried forward to the next eight assessment years to be adjusted against income under the same head. Till recently, the limit of Rs.2 lakh was only applicable for self-occupied property and not for rented property. Now, even rented property will indirectly come under the outer limit of claiming only up to Rs.2 lakh per annum, and the balance must be carried forward to future assessment years.

Basic terms and concepts to understand with respect to Section 24

  • Annual value: It is the capacity of the property to earn income.
  • Municipal value: It is the value of the property as derived by municipal authorities.
  • Fair Rental Value: It is an assumed rental value of the property that is calculated by comparing it with a property having similar features.
  • Standard rent: It is the fair value of rent as prescribed by the Rent control Act, which ensures that tenants are not exploited while owners receive a fair amount of rent.
  • Actual rent received/receivable: It is the actual amount of rent received by the owners from the tenants.

It must be noted that Section 24 is slightly different from Section 80C in the sense that Section 24 benefits are available on accrual and not on actual payment basis. Thus, once your EMI is due, even if you have not paid your EMI on time, you can claim the benefit under the Income Tax Act - Section 24.

How is the GAV calculated?

GAV is the highest of the following three terms:

a) Rent received or receivable
b) Fair Market Value
c) Municipal Valuation
d) Standard Rent if the Rent Control Act is applicable

Illustration 2

Mr. Savant has let out his property on rent and the rent charged is Rs.75,000 per annum. If the municipal valuation is Rs.60,000 and the Fair Market Value as calculated on like properties is Rs.90,0000, the amount of Rs90,000 will be taken as the GAV of your property even though you are receiving only Rs.75,000 as actual rent. This GAV is the base for tax on house property calculation.

Importance of the Net Asset Value (NAV) of the property

NAV = GAV – Municipal Taxes Paid.

Remember, if your property is self-occupied and your GAV is zero, you cannot claim deduction for municipal taxes as well. The benefit of municipal tax can only be claimed if the property shows rental income in the IT return. You don’t have to pay tax on the NAV. There are two more additional deductions available to you from the NAV

  • Standard Deduction which is 30% of the NAV, which is allowed as a flat deduction towards repairs, rent collection, etc. This is irrespective of the actual expenditure incurred and no receipts or proofs are required. This deduction is not allowed if the GAV is nil; hence, it cannot be claimed in case of self-occupied property.
  • Interest on home loan is allowed as a deduction under section 24.

When the above two deductions are reduced from the NAV, you get the taxable NAV, which is included in the total income of the assessee.

Understanding owner vs. deemed owner in case of property…

The person who is entitled to receive the income is called the owner of the property, while the person who receives financial benefits from the property, but is not registered as its owner is called the deemed owner of the property. Income from house property is taxable for the person who actually receives monetary benefits from the property which may or may not be the registered owner of the property.

Two types of deductions are available under section 24

There are two types of benefits available under Section 24 of the Income Tax Act.

1) Standard deduction of 30% of the annual value

2) Interests paid on home loan

Tax Deduction for Home Loan Interest

There are a few basic things to understand here. The exemption is only for the interest component of the home loan and not for the principal component. The principal component is separately eligible under Section 80C of the Income Tax Act. For claiming the benefit, the assessee must procure an Interest Paid certificate from the financer, wherein details are provided along with the break-up of the interest component and the principal component. This certificate will be provided by the bank on a provisional basis by December of each fiscal year.

  • The maximum tax deduction you can get on interest payment of home loan taken for a self-occupied property is Rs.2 lakhs. Your eligibility will be either the actual interest paid or Rs.2 lakh, whichever is less.
  • In case the property for which the home loan has been taken is not self-occupied, i.e., rented or deemed to be rented, no maximum limit for tax deduction has been prescribed and the taxpayer can take deduction of the entire interest amount under section 24. However, if the owner has not occupied the property himself due to his employment, business or profession carried on at any other place, which has forced him to reside at any other place, the amount of tax deduction available stays limited to Rs.2 lakh only. Effective the latest fiscal year, only negative income up to Rs.2 lakh can be carried forward to the IT statement and the rest can be carried forward to the next eight assessment years.
  • It is also important to note that this tax deduction of interest on home loan under section 24 is deductible on payable basis, i.e., on accrual basis. Hence, the deduction should be claimed on a yearly basis even if no payment has been made during the year as compared to section 80C (deduction on principal repayment), where deduction is allowed only on an actual payment basis. However, the catch is that your bank will not give you the interest paid certificate unless you pay the amounts promptly and in full.
  • The benefit of Section 24 will be given depending on the completion of construction of the property. The tax benefit under Section 24 is reduced from Rs.2 lakh to Rs.30,000, if the property is not acquired or construction is not completed within three years from the end of the financial Year in which the loan was taken. This limit of three years has been increased to five years from FY2016-17 onwards.

How to account for pre-construction interest paid on home loan?

The big challenge for borrowers is that loan servicing starts almost immediately, while possession is received only after a gap of six months to a year. During this period, the bank does not charge EMIs, however, interest is charged. This is called as the pre-construction interest paid. Deduction on pre-construction interest is allowed when you have taken a loan for the purchase or construction of house property. However, if the loan is taken for repairs or reconstruction, deduction is not allowed. The deduction for former category interest is allowed in five equal instalments starting from the year in which the house is purchased or in which the construction is completed. For example, if you paid pre-construction interest of Rs.80,000, it can be split into Rs.16,000 per year and claimed as pre-construction interest for five years after the completion of the property construction.

However, the pre-construction interest benefit is not available to the assessee over and above the Section 24 limit of Rs2 lakh; it is carved into that limit. Though pre-construction interest is allowed to be claimed as tax deducted in five equal yearly instalments, which can be claimed at the beginning of the year in which the construction of property is completed, the total amount that can be claimed in a year is subject to a threshold of Rs.2,00,000 in case of a self-occupied house property. Therefore, this pre-construction benefit is available to one only if one’s annual interest component is less than Rs.2 lakh so that the benefit of pre-construction interest can also be claimed by the assessee.

Going beyond Section 24 - the principal component of a home loan

The home loan EMI has an interest component and principal component to it. Normally, in the initial years, the interest component is higher, and in the later years, the principal component is higher. The amount paid as repayment of the principal amount of home loan taken for the construction or purchase of a new house property by an individual/HUF is allowed as tax deduction under Section 80C of the Income Tax Act. Consider the illustration below to better understand the concept.

Illustration 3

Mayank took a home loan of Rs.20 lakh with a 20-year period and an interest rate of 8%. Here is how the principal/interest breakup will look like. The EMI will be Rs.16,729 per month or Rs.200,746 per year. The breakdown of interest and principal will be as under

Year Opening Balance Customer (EMI*12) Annual Interest Cost Principal paid Loan Closing Balance
1 20,00,000 2,00,746 1,58,472 42,273 19,57,727
2 19,57,727 2,00,746 1,54,964 45,782 19,11,945
3 19,11,945 2,00,746 1,51,164 49,582 18,62,363
4 18,62,363 2,00,746 1,47,048 53,697 18,08,666
5 18,08,666 2,00,746 1,42,592 58,154 17,50,512
6 17,50,512 2,00,746 1,37,765 62,981 16,87,531
7 16,87,531 2,00,746 1,32,538 68,208 16,19,323
8 16,19,323 2,00,746 1,26,876 73,869 15,45,454
9 15,45,454 2,00,746 1,20,745 80,000 14,65,453
10 14,65,453 2,00,746 1,14,105 86,640 13,78,813
11 13,78,813 2,00,746 1,06,914 93,832 12,84,981
12 12,84,981 2,00,746 99,126 1,01,620 11,83,361
13 11,83,361 2,00,746 90,692 1,10,054 10,73,308
14 10,73,308 2,00,746 81,557 1,19,188 9,54,119
15 9,54,119 2,00,746 71,665 1,29,081 8,25,038
16 8,25,038 2,00,746 60,951 1,39,795 6,85,244
17 6,85,244 2,00,746 49,348 1,51,397 5,33,846
18 5,33,846 2,00,746 36,782 1,63,963 3,69,883
19 3,69,883 2,00,746 23,173 1,77,572 1,92,311
20 1,92,311 2,00,746 8,435 1,92,311 0

In the above illustration, the column colored in red represents the annual interest component and is eligible for deduction under Section 24 of the Income Tax Act. The column in purple shade represents the principal component, which is eligible for deduction under Section 80C of the Income Tax Act.

Deduction on the principal available under Section 80C

The maximum tax deduction allowed under Section 80C is Rs.1,50,000. The tax deduction on principal repayment is also a part of the various deductions allowed under Section 80C, which includes the amount invested in the PPF Account, tax saving fixed deposits, equity oriented mutual funds, national savings certificate, and senior citizens saving scheme. The deduction limit of section 80C is an umbrella limit and is inclusive of all these options. If you have exhausted your Section 80C limit with PF and ELSS, the principal component does not proffer you any additional benefit. This tax deduction is available on a payment basis and does not depend on the year for which actual payment has been made by the assessee. This is where it differs from the Section 24, which is available on an accrual basis.

An interesting snippet: The amount paid as stamp duty and registration fee is also allowed as a tax deduction under Section 80C. This deduction can be claimed, whether the assessee has taken a loan or not. However, this benefit can only be claimed in the year in which this amount is paid and cannot be carried forward to future years. Further, this benefit is independent of Section 24 and can be claimed under Section 80C even if you have not taken a loan to buy the property. Only Section 24 is contingent on having taken a home loan.

Some key conditions to be eligible for claiming the benefit of principal under Section 80C of the Income Tax Act:

  • This deduction can be claimed if and only if the construction of property is complete, and you have received a completion certificate for the same. You cannot claim the benefit during the pre-construction period. No deduction would be allowed under this section for repayment of principal for those years during which the property was under construction. Normally, banks charge only interest in pre-construction years.
  • This deduction on the principal is agnostic of whether the property is self-occupied or rented out.
  • The benefit can also be claimed for more than one house property.

There is also the aspect of reversal of the benefits under Section 80C benefits…

Once you have claimed the deduction under Section 80C, the house property cannot be sold in less than five years from the end of the financial year in which you received its possession. If you sell the property within this time limit, you will not be eligible to claim any deduction for the principal repaid during the current financial year, and the total amount of tax deduction already claimed in respect of earlier years shall be deemed to be your income of such year in which you sold the property, and you will be liable to pay tax on that income.

For example, if the property is sold after the completion of three years, then in the fourth year returns, the benefit claimed under Section 80C will be reversed and added back to your income. Hence, to continue to get the benefit of Section 80C, assessees need to ensure that the property is not sold before the completion of five years from the date of purchase.

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