Section 24 of Income Tax Act Explained: How to Save Big on Your Home Loan

To incentivise homeownership, the Income Tax Act, 1961 offers tax benefits to homeowners under Section 24 of income tax act. This section falls under the umbrella of “Deductions from income from house property”.

Interest on Home Loan

Homeowners can deduct a portion of the interest paid on a loan taken for purchasing, constructing, repairing, or renovating a residential property. The current maximum deduction limit for self-occupied properties is Rs. 2 lakhs per financial year. However, there are some conditions:

If the construction is not completed within five years from the end of the year the loan was taken, the maximum deduction for interest reduces to Rs. 30,000. There is no restriction on the number of self-occupied properties for which deductions can be claimed, but the total deduction on interest is capped at Rs. 2 lakhs. For rented properties, the entire interest paid on the home loan is deductible.

Standard Deduction

This is a flat 30% deduction allowed on the gross annual value (GAV) of the property. GAV is an estimate of the annual rent that could be earned from the property if it were rented out. This deduction is available regardless of the actual expenses incurred on maintaining the property, making it a convenient benefit.

Benefits of Section 24

Let’s consider an example to illustrate the tax benefit. Assume someone takes a home loan of Rs. 50 lakhs at an interest rate of 10% for a self-occupied property. In the first year, she pays Rs. 5 lakhs as interest. Here’s how Section 24 benefits her:

1. Maximum deduction allowed under Section 24(b) = Rs. 2 lakhs (limit)
2. Taxable income from house property reduces by Rs. 2 lakhs, potentially lowering her tax liability.

Maximising Tax Benefits under Section 24

1. Joint Ownership: Consider co-owning the property with a spouse or parent who falls under a lower tax bracket. This can help you utilize the maximum deduction amount.
2. Time Your Loan Repayment: If possible, try to time your loan repayment such that a larger portion of the interest falls within the financial year.
3. Claim Interest on Additional Loans: If you have taken a top-up loan on your existing home loan, the interest paid on that loan can also be claimed as a deduction under Section 24.

Let’s consider a scenario where a person takes a home loan of Rs. 50 lakhs for a self-occupied property at an interest rate of 8%. In the first year, he pays Rs. 4 lakhs as interest. John can claim a deduction of up to Rs. 2 lakhs on this interest amount, reducing his taxable income by the same amount.

Additional Points to Consider

The deduction is available only for home loans taken from financial institutions approved by the Income Tax Department. The homeowner must be the legal owner of the property or a co-owner along with a spouse or other qualifying individuals. The benefit cannot be claimed for interest paid on loans taken for purchasing land or for paying off a previous home loan.

Section 24 also allows you to claim a deduction for the interest paid during the construction period of the property. However, this deduction is spread over five equal installments starting from the year the construction is completed This can provide some tax relief in the initial years when the property is not generating any rental income. If you own multiple properties, you can choose up to two of them to be considered self-occupied. This allows you to claim the deduction for municipal taxes, standard deduction, and interest on the remaining rented properties.

Rental Income and Taxes

When you rent out a property, the income you receive is considered income from house property and is subject to tax under Section 24 of the Income Tax Act. The rental income is taxed at a flat rate of 30% irrespective of your income tax slab. However, you can claim various deductions to reduce your taxable income from the property. The municipal taxes paid on the property can be deducted from the gross rental income (GRI) to arrive at the net rental income (NRI).

Consider a property with a monthly rent of Rs. 20,000. The annual GRI would be Rs. 2,40,000. The municipal tax paid for the year is Rs. 30,000.

Net Rental Income (NRI) = GRI – Municipal Taxes = Rs. 2,40,000 – Rs. 30,000 = Rs. 2,10,000

Standard Deduction = 30% of GRI = Rs. 2,40,000 * 30/100 = Rs. 72,000

Taxable Income from Property = NRI – Standard Deduction = Rs. 2,10,000 – Rs. 72,000 = Rs. 1,38,000

This income will be taxed at a flat rate of 30%, resulting in a tax liability of Rs. 41,400.

Tax Implications of Self-Occupied Property

There is no direct income generated from a self-occupied property. However, you cannot claim any deductions for expenses incurred on the property, such as property tax, maintenance, or repairs. One benefit of owning a self-occupied property is that you can choose up to two of your properties to be considered self-occupied for tax purposes. This allows you to claim the aforementioned deductions for the remaining rented properties.

Capital Gains Tax

When you sell a property, you might incur capital gains (profit) from the sale. These gains are taxable depending on how long you held the property before selling.

1. Short-Term Capital Gains (STCG): If you sell the property within two years of acquisition, the gains are treated as STCG and taxed at the same rate as your income tax slab.
2. Long-Term Capital Gains (LTCG): Properties held for more than two years before selling qualify for LTCG. LTCG on property is taxed at a flat rate of 20% with the benefit of indexation. Indexation adjusts the purchase price of the property for inflation, reducing the taxable capital gains.

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