Buying a new home brings abundant joy, comfort, and security to most home buyers. Have you taken out a loan to finance your house as well? If yes, you will be happy to know your Home Loan also comes with many tax rebates.
Section 24 of the Income Tax Act offers tax breaks to those who buy a house. These tax rebates are the government’s way of encouraging buyers to purchase or build a residential property. So, let's find out what section 24 of the Income Tax Act is, how tax deduction is calculated on home loan interest, and what you should know as a homeowner to make the most out of it.
What is Section 24 of the Income Tax Act?
The Income Tax (IT) Act 1961 details the exemptions individuals can get on the interest they pay on Home Loans and the income they earn from their residential properties.
If you’re renting a house, the rent amount is considered income. If you own more than one house, the net annual value of all homes is considered income. If you own one home and live in it, the income from the property is considered nil.
When using a Home Loan EMI Calculator for financial planning, factor in the tax exemptions to accurately estimate the overall loan cost.
Must Read: How to Avail Home Loans Tax Benefits
Deduction Under Section 24 for Home Owners
Two types of tax deductions are available on home loan interest under section 24 of the Income Tax Act:
1. Standard Deduction
All taxpayers are allowed a standard 30% deduction of the net annual value of the property. This deduction is allowed regardless of whether their expenditure is high or low or if it’s going into electricity, repairs, insurance, or water charges.
If you live in your home, you will not accrue annual income, which reduces the standard deduction to zero.
2. Deduction On Interest On Home Loan
Most home buyers will only get a home loan if they meet the required eligibility criteria. If you also have a housing loan, you can claim a deduction on the interest component of the loan you pay in a year.
The home loan interest rates vary, and so do the principal and term of all loans. However, you can claim a maximum annual deduction of ₹2 lakhs regardless of your monthly instalments. You may claim a deduction up to ₹2 lakhs while computing your taxable income if:
- You and your family live in the home.
- The property is on rent while you live in another rented accommodation in a different city.
- The house is unoccupied or vacant.
Eligibility Criteria for Claiming Deduction
If you want to claim deductions under Section 24 of the Income Tax Act, you must meet the following criteria:
- Ownership of Property: The taxpayer must be the legal owner of the house property.
- Type of Property: The deduction is available for both self-occupied and let-out properties.
- Purpose of Loan: The home loan should be taken for the purchase, construction, repair, renewal, or reconstruction of the property.
- Completion of Construction: Section 24 of the Income Tax Act for under-construction property says that the construction or purchase of the property must be completed within 5 years from the end of the financial year in which the loan was taken.
- Loan Sanction Date: The loan must be taken on or after April 1, 1999, to claim the ₹2 lakhs deduction on interest for a self-occupied property.
- Proof of Interest Payment: To claim the deduction, the taxpayer must submit an interest certificate from the financial institution.
How You Can Claim Deductions Under Section 24 of The Income Tax Act
To claim deductions under Section 24 of the Income Tax Act, follow these steps:
Step 1: Ensure You Are Eligible: You must be the legal owner of the house property and qualify against all the criteria.
Step 2: Obtain an Interest Certificate: Request an interest certificate from the financial institution showing the total interest paid during the financial year.
Step 3: Include Deduction While Filing ITR: Report the interest deduction under ‘Income from House Property’ when filing your Income Tax Return (ITR-1 or ITR-2).
Step 4: Claim Pre-Construction Interest (If Applicable):If your loan was taken before construction was completed, you can claim a pre-construction interest in five equal instalments starting from the year of completion.
Step 5: Maintain Proper Documentation:Keep records of loan agreements, EMI payment proofs, interest certificates, and construction completion certificates to support your claim in case of an audit.
Must Read: How to Avail Tax Benefits on a Joint Home Loan
Other Deductions on House Property Income Apart from Section 24
Apart from deductions under Section 24, homebuyers can also avail of additional tax benefits under Sections 80C, 80EE, and 80EEA, further reducing their taxable income.
- Section 80C: Allows a deduction of up to ₹1.5 lakh on the principal repayment of a home loan for self-occupied or rented residential properties. The property must not be sold within five years of possession.
- Section 80EE: Provides an extra ₹50,000 deduction on interest for first-time homebuyers, applicable if the loan amount is ₹35 lakh or less and the property value does not exceed ₹50 lakh. The loan amount must be sanctioned between April 1, 2016, and March 31, 2017.
- Section 80EEA: Provides an extra ₹1.5 lakh deduction on home loan interest for eligible buyers if the loan was sanctioned between April 1, 2019, and March 31, 2022. The property must be your first home to qualify, and the value of the property must not exceed ₹45 lakh under the affordable housing category. The benefit applies solely to interest payments, not principal repayment. If eligible under both Section 24 and Section 80EEA, you can claim a total deduction of ₹3.5 lakh (₹2 lakh under Section 24 + ₹1.5 lakh under Section 80EEA).
Common Mistakes to Avoid While Claiming Section 24 Deductions
- Not Completing Construction on Time: To claim the ₹2 lakh deduction on home loan interest for a self-occupied property, the construction must be completed within 5 years from the end of the financial year in which the loan was taken.
- Incorrect Loan Purpose: Deductions under Section 24 apply only to loans taken for the purchase, construction, repair, renewal, or reconstruction of a property. Interest on personal loans or loans for land purchase without construction does not qualify.
- Claiming Deduction Without Possession: Interest deduction is available only after possession of the property. However, you can claim pre-construction interest in five equal instalments, which start from the year of completion.
- Not Maintaining Proper Documentation: Failing to submit an interest certificate from the lender may lead to the rejection of the deduction claim.
- Exceeding Deduction Limits: For self-occupied properties, the maximum deduction is ₹2 lakhs, while total loss from house property (for let-out properties) is capped at ₹2 lakh per year.
Wrapping Up
Section 24 provides substantial relief and can help you lower the cost of your loan. To ensure the accuracy of your forecasts, , please use a home loan eligibility calculator to accurately estimate the loan amount you can avail, along with the tax rebates you’re entitled to.
Being aware of taxation rules can help you save a lot of money each year. Research all aspects, including the taxation rules, when you apply for a Home Loan and get the best deal for yourself.
FAQs
How much deduction can I claim under Section 24 for a rented property?
If your house is rented out, you can claim a deduction on the full home loan interest you pay. However, the total loss from house property is limited to ₹2 lakh per year, which can be adjusted against your other income.
Can I claim deductions for more than one property under Section 24?
Yes, you can claim deductions for multiple properties. For a self-occupied house, the maximum deduction is ₹2 lakh. For rented properties, the full interest is allowed, but the total loss from house property cannot exceed ₹2 lakh per year when adjusting with other income.
What happens if my house construction is delayed beyond five years?
If your house takes more than five years to be completed, the maximum interest deduction for a self-occupied property reduces from ₹2 lakh to ₹30,000. However, for a rented property, you can still claim the full interest amount.
What is the difference between Section 24 and Section 80EE?
Section 24 gives a deduction of up to ₹2 lakh on home loan interest for self-occupied houses. Section 80EE provides an extra ₹50,000 deduction for first-time homebuyers who meet specific conditions. If eligible, you can claim both deductions together for more tax savings.
