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What is Section 24 for Income Tax Act?

By: Makemymoney

Section 24 of the Income Tax Act

Owning your own house is a dream of every individual, everyone wants to live in his house. It gives mentally and financially satisfaction. Buying a house requires a huge sum of money and a big investment. It’s very difficult for an individual to arrange such a big amount at a time in a place like Delhi, the minimum cost of a house is 30 to 40 lakhs. Fortunately, one can avail an easy home loan from a bank to purchase his own house. At present, banks are financing up to 90% of the cost of the house.  Nowadays, normally the tenure for a repayment period of home loan is 20 years. Buyer needs to pay a small amount monthly that is called EMI.

After purchasing the house, the buyer pays monthly EMI toward the loan amount. The amount paid by the borrower every month is a significant part of borrower’s monthly income. Therefore, the Income Tax department has provided certain provisions that provide relaxation to the income of the taxpayer. One of them is Section 24 of the Income Tax Act. Under this Section of the Income Tax Act 1961, the taxpayer gets a deduction of interest paid on his home loan during the financial year while calculating his taxable income. Interest that is paid on a home loan during the financial year is subtracted from the borrower’s income to arrive at net taxable income.

While calculating the net taxable income, it is important to determine the income for house property, Income from the house is calculated on the basis on  Annual Value. The steps in calculating Annual are-

  • First, Gross Annual Value is determined GAV is the highest of actual rent received, fair market and municipal rent.
  • Municipal taxes deducted from Gross Annual Value to determine Net Annual Value.
  • Now, Annual Value =  Net Annual Value – all deductions.

Section 24 of income act is called Deduction from income from house property

There are 2 types of deductions.

Standard Deduction  It is calculated as 30% of Net Annual Value. This type of deduction is not applied to self-occupied houses.

Interest on borrowed capital  If the home loan is taken to purchase or construct or reconstruct the house, interest paid on such loan is available as a deduction. It should be calculated every year separately. If it is a self-occupied house, the maximum deduction is 2 lakh per year. In the case of a rented house, there is no upper limit.

Here, house means that is purchased, constructed, reconstructed or renewed.

Only the interest component of EMI is considered. Principle paid is not taken into account. The interest component of the loan repaid may vary every year so it’s necessary to determine interest each year separately.

If the home loan is taken for the construction of the house, there is no deduction for the pre-construction period. Under section 24 of the Income Tax Act 1961, the deduction is allowed only after the construction is completed.

If the home loan is availed for construction of the house, and the construction of the house is not completed within 5 years from the date of availing the loan. The maximum deduction that can be availed in 1,70,000 under this section.

In case the house is not purchased within 5 years from the date of loan maximum 1,70,000 can be the deduction.

Due to occupation or employment, owner of the house is residing in another city, He is allowed only 2 lakh as a deduction under section 24 of the IT act.

Commission or processing fee paid is not allowed as deduction.

Now let us take an example. Ritu who is working in an MNC company in Delhi decided to buy a house for herself. She chooses a house which costs Rs 50 lakhs. She only has Rs 10 lakh with her. So she decided to avail a home loan from the bank for Rs 40 lakh. She applied for the loan, got it and bought a house. The loan was of Rs 40 lakh for a tenure of 20 years at the rate of 8.50% per annum.  Her monthly EMI will be Rs 34,713.

Now she lives in that house only, means it is self-occupied. Now let’s assume, standard rent in her locality is Rs 10,000 monthly, so annually it is Rs1,20,000, it’s the annual value which is deemed income from house property.

Now coming to deduction, Monthly EMI is Rs 34,713, so total EMI paid in the first year is Rs 4,16, 556. Out of total EMI paid Rs 3,36,946 is the interest component of it but as it is a self-occupied house, Ritu can avail Rs2 lakh as a deduction under section 24 of the Income Tax Act.

Also read – Tax Benefits Of Home Loan Under Section 80C, 24 And 80EE

Now let’s take the same example again with a difference that the house was rented by Ritu for a rent of Rs 13000 monthly, So Ritu received Rs 1,56,000 as rent in the first year.  This amount of Rs 1,56,000 will be added to Ritu’s taxable income. Therefore, Rs 3,36,946 is allowed as a deduction to Ritu under section 24 of the Income Tax act 1961.

Please note that section 24 of income tax is not applicable to Loan Against Property (LAP). No deduction is allowed on interest paid on LAP as it is not a home loan product. It is a type of mortgage loan as you mortgage your house to take the amount from the bank. This amount can be used for any purpose.

To buy a property in Delhi NCR region, almost all the bank provides a home loan it is very easy to get a home loan if you provide proper documents and meet eligibility criteria. A home loan can be applied both offline and online mode. Every bank has the facility to apply for a home loan through their websites. It’s very easy to fill the online form.

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