Section 24(b) decoded: A comprehensive look at house property income deductions

Summary: Section 24(b) of the Income Tax Act offers taxpayers deductions on interest from loans used for purchasing, constructing, or renovating homes. This comprehensive guide delves into the types of loans covered, various income sources from house property, and the conditions to claim these deductions. Through practical examples and implications of recent tax amendments, readers gain a clear understanding of how to optimize their tax benefits related to house property.

Owning a home is a dream for many, and for Indians, it's often a significant milestone. But with the joy of purchasing a new home comes the responsibility of managing finances, especially when loans are involved. Enter Section 24(b) of the Income Tax Act, a beacon for homeowners. Let's dive deep into this section and understand how it can be a boon for taxpayers.

Understanding Section 24(b)

At its core, Section 24(b) is a taxpayer's best friend, especially if you've taken a loan for your dream home. Why, you ask? Well, this section of the Income Tax Act allows you to claim a deduction on the interest of a loan you've borrowed, whether it's for purchasing a brand-new house, constructing one from scratch, or even giving an existing home a facelift through renovation. 

Types of loans covered under Section 24(b)

Ah, the age-old question: What kind of loan can I take to avail the benefits of Section 24(b)? Well, the answer might surprise you. The Income Tax Act doesn't play favourites when it comes to the type of loan you've taken. Whether you've opted for a personal loan to give your ancestral home a modern twist or secured a housing loan to buy that dream apartment overlooking the sea, Section 24(b) has got your back.

Imagine you're buying a house, but instead of paying the entire amount upfront, you decide to pay the seller in instalments, much like an EMI. And guess what? Even in this scenario, the interest you're paying on those instalments is eligible for a deduction under Section 24(b). The Act ensures that you can claim this deduction if the loan amount is used for housing purposes, be it buying, constructing, or even renovating. 

Income from house property

Now, let's talk about the elephant in the room - the income you earn from your house property. For many, buying a home is not just about having a roof over their heads. It's an investment, a source of income. And the Income Tax Act, being the comprehensive document that it is, has provisions for that too.

There are primarily three types of incomes that fall under the 'Income from House Property' category:

• Rental Income: If you've let out your property, the rent you receive is your Gross Annual Value. It's the money that hits your bank account every month, courtesy of your tenant.
• Deemed Rental Income: Let's say you own more than two properties. While you might live in one and rent out the other, the third property, even if it's not rented, is considered 'deemed' to be let out. In such cases, the rent of a similar property in the vicinity is considered as your Gross Annual Value, even if you're not actually earning any rent from it.
• Self-occupied Property: If you're living in your own house, the annual value of that property is considered Nil. But here's a twist. If you're paying interest on a home loan for this property, the income value can even be considered negative due to it being a cost incurred by you. This translates to a deduction on your total gross income and reduces your tab obligation.

Deductions covered under Section 24(b)

If you're a homeowner, Section 24 of the Income Tax Act is your best friend. Here are the various tax deductions you can claim under its provisions:

1. Municipal tax:

If you're paying municipal taxes, you're in luck. These are the annual amounts you shell out to the local municipal corporation. You can deduct these taxes from the Gross Annual Value of your property to arrive at the Net Annual Value. But remember, this deduction is only valid if you, the owner, have paid these taxes during that financial year. So, always keep those receipts handy!

1. Standard deduction:

Here's a fun fact - you get a standard deduction of 30% of the Net Annual Value, irrespective of your actual expenditure on the property. Whether you've spent more or less on aspects like insurance, repairs, or utilities, this 30% is yours to claim. However, for a self-occupied house property, the Annual Value is considered nil. This means, unfortunately, the standard deduction for such a property is also zero.

1. Deduction on home loan interest:

Now, this is where things get interesting. If you or your family reside in the house property, you can claim a deduction of up to INR 2 lakh on your home loan interest. The same goes if the house is vacant. But if you've rented out your property, you can claim the entire interest on your home loan as a deduction. There's a catch, though. Your deduction on interest is capped at INR 30,000 if:

• The home loan was for purchasing or constructing a property.
• The loan was availed on or after 1 April 1999.
• The purchase or construction was completed within 5 years from the end of the financial year in which the loan was taken.

Understanding pre-construction interest

Next, let's clarify what pre-construction interest is and how it can impact your tax and deductions. 

Imagine you've taken a loan for purchasing or constructing a house property. Any interest paid before the completion of the construction or acquisition of the property is what we call pre-construction interest. But if you've taken a loan only for repairs or reconstruction, this deduction won't apply. It’s also worth noting that you don’t have to claim this deduction all at once. It can be claimed in 5 equal instalments, starting from the year when the house was purchased, or the construction is completed. For instance, if your property's construction wrapped up in FY 2022-23, say on 25 June 2022, you can claim 1/5th of the interest paid up till 31 March 2022 when you file your return for FY 2022-23.

Computation of income under house property

Alright, now that we've established the groundwork, let's take a look at how we can compute the income from your house property? A hypothetical scenario can help make this clearer:

Imagine Mr. Sharma repays a housing loan of Rs 4 lakh annually. Out of this, Rs 2 lakh is the interest component. He's also incurred a pre-construction interest of Rs 3 lakh. Additionally, he earns a monthly rent of Rs 7000 from a let-out property and pays municipal taxes of Rs 3000 for the house.

• Scenario 1: Self-occupied property

If Mr. Sharma's property is self-occupied, the annual value is considered nil. So, after deducting the home loan interest, the house property income becomes negative. This negative amount can be set off against other incomes of the current year. If there's a loss, it can be carried forward for the next 8 assessment years but can only be set off against future house property income.

• Scenario 2: Rented property

In the case of a rented property, the actual rent received is considered as the 'Gross annual value'. Deductions like municipal taxes paid and actual interest on the housing loan are allowed. For Mr. Sharma, he can claim the actual home loan interest paid of INR 2.5 lakh as a deduction for the let-out property.

New tax regime implications

The introduction of the 'New Tax Regime' for FY 2022-23 brought about significant changes that impact every taxpayer. The new regime does not provide for deductions of interest on home loans under Section 24(b). This means that if Mr. Sharma, from our earlier example, opts for the new tax regime, he won't be able to claim the deduction on the interest he pays on his home loan. Moreover, the deduction under Section 80C for the repayment of the principal amount of the home loan also gets the axe which can significantly impact the tax-saving strategies of many homeowners.

Conclusion

Whether you're a first-time homeowner or someone who's been on this journey for years, always keep an eye on the changing tax landscape. Deductions like those under Section 24(b) can make a significant difference to your finances. So, plan wisely, stay informed, and make the most of the opportunities the Income Tax Act offers you.

Disclaimer

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