Posts tagged: Interest on housing loan deduction

A self-occupied house owned by the taxpayer doesn’t generate any income for him, but it requires disclosure in his tax returns. It falls under the head ‘Income from House Property’, and the tax department also allows some deductions concerning the same for reducing your overall tax liability.

In this article, we discuss the tax benefits that you can avail from your self-occupied house.

When is a property termed ‘self-occupied’?

A self-occupied property refers to a house where the owner or/and his family members reside and use it for residential purposes. Even if the taxpayer doesn’t occupy the house for the entire year due to him living in some other city, the Income Tax Act assumes the house to be self-occupied for the whole year.

What is the Gross Annual Value of a self-occupied property?

As per the income tax provisions, the Gross Annual Value (GAV) of a self-occupied property is considered NIL for Income from House Property calculations. The concepts of Fair Rent, Municipal Value, and Standard Rent are not applicable in such cases.

I paid municipal tax for my residential property. Is it allowed as a deduction?

The income tax department takes the GAV of such property as NIL. Therefore, they don’t allow a deduction for the municipal value paid by the assessee for the same. Even the concept of Standard Deduction under Section 24(a) does not apply here, which means general repair expenses aren’t covered too.

I paid interest on a home loan of INR 2.40 lakhs. Will I get the entire amount as a deduction for my self-occupied property?

The tax department allows interest on the loan as an eligible deduction under ‘Income from House Property’. For self-occupied houses, the maximum limit of deduction is INR 2 lakhs in a financial year even if you have paid a higher amount of interest. This deduction is treated as a “Loss under the head House Property” which can be set off against other allowable heads of income. However, it is important to bear in mind that such loss that can be set off is subject to a limit of INR 2 Lakhs. If the taxpayer doesn’t have any income against which such loss can be set off, it can be carried forward for eight consecutive years.

Illustration for better understanding:

Parker brought a house in FY24 by taking a home loan amounting to INR 35 lakhs. He has been living there with his spouse since then. The family made a principal repayment of INR 12 lakhs and interest to the tune of INR 2.50 lakhs in the FY24. He also paid INR 50,000 as municipal taxes for the same period. Calculate his ‘Income from House Property’ for the FY24

Such loss from House Property can be set off against income from different heads only to the extent of INR 2 Lakhs or can be carried forward for 8 years, accordingly.

The increasing rental costs have propelled people to look for viable alternatives such as purchasing their own houses. Since the property cost is also skyrocketing at a rapid pace, it has pushed the income tax department to provide some tax benefits to make owning a home a more feasible option.

Section 24

Section 24 covers two significant deductions:–

Section 24(a) – Standard Deduction

A taxpayer having income under the head ‘Income from House Property’ doesn’t get deductions for general repairs and maintenance charges. They instead get a standard deduction of 30 percent of the Net Annual Value. If you are self-occupying a property, the deduction does not apply to the same.

Section 24(b) – Interest on Loan

Section 24(b) of the Income Tax Act, 1961 allows a deduction of maximum INR 2 lakh as standard deduction against interest on the loan, in case the house is self-occupied. In case of let out properties, deduction for interest on home loans is not subjected to any limits. It includes interest income earned in pre-construction period which can be claimed in five equal instalments.

If one does not satisfy the following conditions, the limit is restricted to INR 30,000:

• One uses the home loan only for purchasing or constructing the house.
• The construction or the acquisition of a home is complete within five years from the end of the financial year in which the one got the loan.
• It was borrowed after 1st April 1999.
• The institution sanctioning the loan must certify that the purpose of loan is for construction or acquisition of the house or for refinancing an earlier loan for the same reason.

Example:

Abhishek works in Kolkata for an MNC. He recently bought a house in Delhi with the help of a home loan of INR 40 lakh in FY24. His spouse and parents occupy the property, and he is paying an interest of INR 15,000 per month currently in FY25. Compute his ‘Income from House Property’ for FY25, assuming that he owns only one house.

 Solution:

In the given case, Abhishek’s Gross Annual Value is NIL as the house is self-occupied. Further, he has paid INR 15,000 * 12, i.e. INR 1.80 lakhs for the FY25. So, he has made a net loss under the head ‘Income from House Property’ amounting to INR 1.80 lakhs.

If he has a positive balance under other heads of income, he can set off the entire loss in the current year. Otherwise, the tax department allows taxpayers to carry forward such loss for eight consecutive financial years. But to avail the deduction, he has to file his Income Tax Return for FY25.

Section 24 of the Income Tax Act, 1961

Buying a home is a need for some people, while many others consider it as an asset or investment. As you know, you can avail tax exemptions on specific investments and expenditures. Housing property is one among them. Section 24 talks about exemptions on the interests on home loans. In this blog, let us analyse Section 24 in detail.

How is income from house property determined?

Rental income generated from house property is chargeable under the head “Income from House Property” in the following cases:

• If you are letting out your house property.
• If you own multiple houses, the Net Annual Value of the properties, excluding two houses, is added to your income

The income under the head “House Property” is taxable after deductions made under Section 24. However, if you own two houses and you do not own any other property, the income from house property is NIL.

There are two permissible deductions under this section:

Standard deduction

As per standard deduction, a sum equal to 30% of the Net Annual Value of the property is exempted from tax. Any taxpayer can avail this exemption on income from house property.

Deductions on interest incurred against home loans

This deduction applies to the interest payable on the borrowed capital for the house property. You can avail exemption on interest on home loans taken for acquisition, construction, repair, renewal or reconstruction of the property.

The following conditions apply to avail deduction on interest of home loans under Section 24:

• If you or your family resides in the property for which the loan has been taken, you can claim a deduction up to Rs 2 lakh on the interest.
• If you have rented out the property or deemed to rent out the property, the whole interest amount is liable for a tax deduction.

To claim deductions under Section 24, you should have the interest certificate of the loan you have availed.

Points to remember

• The maximum deduction limit on interest is Rs 30,000 if the purchase or construction of the property is not completed within five years, starting from the financial year in which the loan was taken.
• You can claim a deduction for pre-construction loans for buying or constructing a property. You can avail deduction of such interest in five equal instalments from the year in which such construction is completed. The maximum limit for deduction on interest of pre-construction loan is Rs 2 lakh.

Note that the tax liability of income from house property is on the person who receives the financial benefit. It may or may not be the registered property owner.