Tax benefits against interest paid on home loan

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.