This article has been written by Nikunj Arora, a student of Amity Law School, Noida. This article provides a detailed overview of Section 24 of the Income Tax Act, 1961, along with the applicable and related judgments. This article also gives an introduction to ‘income from house property’ along with the deductions made under Section 24 of the Income Tax Act, 1961.

This article has been published by Sneha Mahawar.

Introduction

Many of us dream of building our own house. But unfortunately, the property prices are so high that few people can afford to own a home without having to take out a loan. There are several banks and financial institutions that offer home loans to their clients at easy EMIs. Moreover, the Indian Government too gives plenty of incentives regarding this. In particular, the government provides tax deductions on income from home property. These deductions are discussed in Section 24 of the Income Tax Act, 1961 (ITA/Act).

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The income from a property consisting of buildings or land attached to them falls under the heading of ‘house property’. According to this heading, house properties fall into three categories, i.e., let-out house property, self-occupied house property, and deemed let-out house property.

In calculating the income from a house, its annual value is taken into account. In determining annual value, several factors, such as municipal valuation, fair rent, standard rent, and actual rent, must be considered. The value of a property is calculated on a notional basis, even if it is not really rented during the year, and hence taxed accordingly. For properties that are self-occupied or cannot be occupied by the owner because of his employment, business or profession at another location, the value of one or two such properties is defined as “nil”.

This article, therefore, revolves around Section 24 of ITA and the deductions under it.

Income from house property in India

‘Income from house property’ means any income derived from house property, whether it be in the form of rental income or upon its transfer. Thus, houses, buildings, offices, and warehouses are all considered to be ‘house property’ under the ITA. A house property income is one of five sources of gross total income (GTI) that is included in the computation of the assessee’s GTI for the year. Several deductions must be taken into account before the income from house property is taxable.

The following three conditions must be met in order for the income to be taxed under Income from House Property:

  • In order to be considered a house, its property must be a building, land, or an apartment,
  • The property owner should be the assessee, and
  • Furthermore, the property should not be used for business purposes.

A property can be self-occupied, let out, or inherited. Under income tax rules, the income taxable under the heading ‘Income from House Property’ is calculated in a specific manner for both self-occupied properties and let-out properties. The term self-occupied refers to a house that is being occupied by the assessee for residential purposes and which may also be occupied by family members.

Accordingly, a vacant house is also regarded as a self-occupied dwelling for income tax purposes. There are, however, some exceptions. In some cases, the assessee may not be able to occupy the property due to employment issues, and he or she may not derive any other benefits from it. Two or more houses can be treated as self-occupied, while any house other than those two is considered a rental property.

Calculation of income from self-occupied house property

The income deductible under ‘Income from house property’ is calculated as follows when considering self-occupied property:

  • Self-occupied properties are considered to have a Nil Gross Annual Value, from which the municipal taxes paid during the year are subtracted to arrive at the Net Annual Value (NAV) of the property.
  • The above-mentioned NAV is further deducted by two deductions under Section 24(a) Standard Deduction of 30 percent of NAV can be claimed under Section 24 (a), while the deduction for interest paid on borrowed capital (home loan) can be claimed under Section 24(b).
  • Section 24 deductions allow the resultant income to be taxed after deductions.

As the Gross Annual Value of a self-occupied property is Nil, one is always left with either Nil or a negative number (if one takes out a mortgage), which can be added to other sources of income.

Calculating rental income from a rental property

If the assessee rents out a house property even for a few months, the property is considered to be a rental house property, and the income tax is calculated accordingly.

The following steps will help you determine the income from a rental property:

  • Gross Annual Value (GAV) of the property: To begin, determine the amount of rent received each year.
  • Reduce property tax: Property tax is deducted from the GAV of a property when it has been paid.
  • Arriving at NAV: Deduct the Municipal Taxes paid during the year in order to arrive at the Net Annual Value (NAV).
  • Reduce 30% of NAV: Section 24 of the ITA allows a deduction of 30% on NAV. Subtract the Standard Deduction, 30 percent of the Net Annual Value, and any interest on the mortgage, if any, to get the final income from the let-out property.
  • Reducing home loan interest: In addition, the interest paid during the year on a housing loan qualifies for a deduction under Section 24.
  • Loss from house property: The deduction for home loan interest is not available when a self-occupied house is owned, since its GAV is zero. It can be offset against income from other heads.

The steps outlined above make it easy to calculate rent for self-occupied houses as well as rented houses. 

What is Section 24 of the Income Tax Act, 1961

Under Section 24 of the ITA, there are two deductions from annual value, i.e.,

  • 30% of NAV; and
  • Interest on borrowed capital.

Section 24(a) of the Income Tax Act, 1961

30% of NAV is allowed as a deduction under Section 24a of the ITA. This is a flat deduction and is allowed irrespective of the actual expenditure incurred. Due to the fact that the annual value itself is nil, the assessee will not be eligible for a deduction of 30%, in the following cases:

  • In case of self-occupied property; or
  • When the property is held as stock-in-trade and is not let for the whole year or for any part of the year prior, the certificate of completion of construction of the property may be obtained up to 2 years after the end of the financial year the certificate was obtained from the competent authority.

Section 24(b) of Income Tax Act, 1961

Interest on borrowed capital is allowed as a deduction under Section 24b. Deductions can be claimed for interest paid on loans taken out for acquisition, construction, repairs, or renewal. Deductions can also be made for the interest on an additional loan taken to repay the original loan raised earlier for the same purpose.

Interest for the pre-construction period

Pre-construction period is the period prior to the previous year in which property is acquired or construction is completed. Interest payable on borrowed capital for the period prior to the previous year in which the property has been acquired or constructed (Pre-construction interest), can be claimed as a deduction over a period of 5 years in equal annual installments commencing from the year of acquisition or completion of construction. Interest relating to the year of completion of construction/ acquisition of property can be fully claimed in that year irrespective of the date of completion/ acquisition.

Illustration:

The loan of Rs. 5,00,000 was taken on May 1, 2006. Construction was completed on September 7, 2021. It is estimated that the pre-construction/acquisition period will extend from May 1, 2006, until March 31, 2012. A pre-construction or pre-acquisition interest rate equal to Rs 3,55,000 (Rs 5,00,000*71 months*1%) shall be calculated.

Preconstruction/Acquisition Interest Deduction for FY 2012-13 to 2016-17 under the assumption that the property has been let out or is deemed to have been let out shall be equal to Rs 71,000 per year (3,55,000/5).

Pre Construction/Acquisition Interest Deduction for Financial Year 2012-13 to 2016-17 assuming SOP shall be Rs 71,000 per year (355000/5) since the construction is completed within 5 years from the end of the FY, in which capital was borrowed)

The interest from April 1, 2012-March 31, 2013 shall be deducted as current year interest in 2012-13. The period of interest from April 1, 2012-September 7, 2012 shall not be included in the pre-acquisition/construction period.

Even if your house property is in the same city in which you reside on a rented property, you can still claim House Rent Allowance under Section 10(13A) and interest deduction. In order to ensure that your employer takes into account this section of the tax code and deducts lower TDS, you will need to file Form 12BB with your employer.

In M/s.Windermere Properties Pvt.Ltd. (2013), the Court held that in addition to interest deductions, prepayment charges may also be deducted under Section 24b. It is not permissible to deduct interest on borrowed money payable outside India under section 24(b) unless the tax on it has been paid or deducted at source and there is no person in India who can be designated as the recipient’s agent for such purposes.

Deduction in case of co-borrower

When a home loan is taken on joint names, each of the co-borrowers has a deduction in proportion to his share of the loan. The co-borrower must also be part owner of the property in order to qualify for this deduction. An assessee who is a co-owner but pays back the full loan himself can deduct the interest he has paid. The deduction limit for self-occupied properties applies to each co-borrower separately. The deduction can be claimed by each co-borrower up to a total of Rs. 2 lakh/Rs. 30,000. There are no limits for letting out properties.

Difference between Section 24b and Section 80C

Section 24b allows interest on home loans while Section 80C allows principal on home loans. Listed below are comparisons between Sections 24 and 80C:

Tax deductions: 

Under Section 24b, tax Deduction is allowed only for interest, while under Section 80C the tax Deduction is allowed only for the principal.

Basis of tax deductions: 

The tax deduction under Section 24b is made on the basis of accrual basis, while the tax deduction under Section 80C is made on the basis of cash basis.

Amount of deduction: 

Under Section 24b the amount of deduction in the self-occupied property is Rs. 2,00,000, from the assessment year 2015-16, and in cases other than the self-occupied property, there is no limit. On the other hand, under Section 80C, the amount of deduction is Rs. 1,50,000, from the assessment year 2015-16.

Purpose of loan: 

The purpose of a loan under Section 24b should be for the purchase or construction or repair or renewal or reconstruction of a residential house property. Under Section 80C, the purpose of a loan should be for the purchase or construction of a new house property.

Eligibility for claiming Tax deduction: 

Eligibility for claiming tax deduction under Section 24b is that purchase or construction should be completed within 3 years, and under Section 80C, there is no eligibility.

Restriction on sale of property: 

Under Section 24b, there is no restriction on the sale of property, however, there is a restriction under Section 80C. Under Section 80C, the tax deduction claimed would be reversed if the property is sold within 5 years from the end of the financial year in which such property is acquired by him.

Deduction during construction period: 

Under Section 24b, the interest paid during the construction or the acquisition period shall be allowed in 5 equal installments from the last day of the preceding Financial Year in which the construction is completed, and under Section 80C, no deduction is available for the principal repayment during the construction/acquisition period.

Basically, a deduction of 30 percent on a property’s net annual value is provided by Section 24. For self-occupied properties, the deduction is ‘nil’ according to the IT Act, regardless of whether municipal taxes have been paid or not. Thus, if a purchaser purchases a property with his own resources, that is, without obtaining a mortgage, and generates rental income from it, he can claim Rs 30 as a deduction from every Rs 100 earned. In the case of self-occupied properties, however, the owner may not take advantage of Section 24 deductions.

As a matter of clarification, it is important to note that income derived from house property is taxed on its net annual value rather than its gross annual value. An estimate of the net annual value of a property is derived by deducting the amount paid to the municipal government as part of the tax bill. It should also be noted that this section applies to buyers who have financed the purchase, construction, repair, renewal or reconstruction of the property using a mortgage. There are two possible outcomes in such cases:

  • For properties that do not generate income (self-owned or vacant properties), the borrower can claim a deduction for the interest paid on the home loan up to Rs 2 lakhs under Section 24.
  • If the property generates income for the borrower through rental income, then the borrower is entitled to deduct the entire interest component associated with the home loan. It is intended to encourage property owners to rent out vacant properties.

Deductions under Section 24 of Income Tax Act, 1961

The following are the deductions provided under Section 24 of ITA:

Standard deduction

Taxpayers may benefit from a standard deduction of 30% based on their net annual income. By default, this deduction is not available for self-occupied properties. With a self-occupied property, the annual net value is zero and therefore the standard deduction is also nil.

Deduction on interest on a home loan

The owners of the house are able to claim an income tax deduction of Rs. 2 lakhs (Rs. 1,50,00,000, in case of filing income tax returns for the FY 2013-2014) on the interest of the home loan, if the owner is living with his family. It should also be noted that if the house is vacant, it is also eligible for the same treatment. However, if the house is rented out, the entire interest from the home loan is deductible. House owners who do not meet any of the following conditions cannot receive a rebate of up to Rs.2 lakhs on the interest on their home loan. In such a case his income tax rebate on the home loan interest cannot be more than Rs.30, 000. Therefore, to claim a deduction of Rs.2 lakhs in income tax, you must meet the following requirements:

  • A home loan must be taken on or after April 1, 1999.
  • Construction or purchase of a home may be the purpose of the loan.
  • Within five years from the end of the financial year in which the home loan was taken, the construction or purchase for which the loan is taken should be completed.

To be eligible for deductions under Section 24 of the ITA, a person needs to compute the amount of interest that has to be paid by him/her to the financial institution or bank for the grant of the loan; separate from the repayment of the principal. No matter how much one is paying to the loan lender, he/she gets tax exemptions on the whole annual interest amount.

Here are a few things to note under Section 24:

  • When you do not live in the house, you are entitled to claim a tax deduction for the entire interest amount that you are paying.
  • If you do not live in the house due to employment or business commitments, and you live in another property or rented property in the city of employment, then your tax exemption on interest payment is restricted to Rs. 2 lakh.
  • In the case of arranging a loan or a tenant, no brokerage fee or commission is deducted.
  • In order to claim maximum deductions on loan interest, you must complete the house construction or purchase within 3 years after taking the loan. The amount you can claim instead of Rs. 2 lakh will be only Rs. 30,000 if the construction or purchase is not completed within three years.
  • The loan that you are taking needs to be backed up by an interest certificate.

In Mr. Abeezar Faizullabhoy v. CIT (ITAT Mumbai) (2019), the Court stated that for any acquisition, construction, repair, renewal, or reconstruction of a property, an assessee is entitled to deduct any interest payable on the capital borrowed. By way of an agreement dated September 20, 2009, the assessee acquired the residential property in question.

The issue of this case was:

Is it appropriate for the lower authorities to deny the assessee’s claim for an interest deduction on a loan that was used to purchase a residential house pursuant to a registered “agreement” dated 20.09.2009, in light of the law and the facts of the case?

As per the Court’s considered opinion, there is neither a precondition nor an eligibility requirement that an assessee has taken possession of the property purchased or acquired by him in order to claim deductions for interest under Section 24(b) of the Act. Accordingly, the first and second provisions of Section 24(b) only contemplate an inherent upper limit of deduction for residential properties referred to in sub-section (2) of Section 23.

Nevertheless, the aforesaid provisos do not affect the right of an assessee to deduct the amount of interest he pays on any capital borrowed to acquire, construct, repair, renew or reconstruct a residential property that is not within the scope of sub­section (2) of Section 23 of the Act. Furthermore, the Court was unable to accept the view of the Income-tax tribunal that since the assessee would not have any control/domain over the property in question, deduction under Section 24(b) of the said property would seem inconceivable.

According to Section 22 read with Section 23 of the Act, the annual lettable value of a property is determined based on the ownership of the property, without regard to whether it has yet been occupied by the assessee. While it is true that the plain literal interpretation of Section 24(b) of the Act does not prohibit assessees from claiming deductions for interest due on loans taken for buying residential properties, even if a possession did not vest with him, even otherwise, the logic put forward by the CIT(A) for declining the assessee’s claim clearly runs contrary to the mandate of Section 22 to 24 of the Act.

Since the assessee in the case before had admitted to having paid interest of Rs. 2,69,842.12 on the capital that was borrowed by him for acquiring the property in question, which was evidently borne out by the certificate filed in assessment proceedings, the Court was unable to buy into the lower authorities’ decision not to allow him to deduct interest pursuant to Section 24(b) of the Act. Therefore, the Court held that the Assessing Officer (AO) should allow the assessee’s claim for deduction of Rs. 2,00,000 under Section 24(b) of the Act.

Section 24 and Section 80EE of the Income Tax Act, 1961

For loans taken between 1 April 2019 and 31 March 2022, the government has now extended the interest deduction, under the objective “Housing for all”. In order to enable interest deductions in AY 2020-21 (FY 2019-20), a new Section 80EEA has been inserted. For loans sanctioned from a financial institution from 1 April 2016 to 31 March 2017, the old Section 80EE permitted first-time homebuyers to deduct up to Rs 50,000 in interest paid.

The government has extended the benefit for FY 2019-20 in order to further the benefit and stimulate the real estate sector.. The deduction can be claimed until the loan is repaid.

Under the Income Tax Act, Section 24 and Section 80EE are closely interrelated. An assessee can claim a tax deduction against the interest payable on a loan when calculating their income.

However, the following conditions must be met:

  • A home loan is taken to acquire a house property for residential purposes only.
  • In order to get a residential property, the borrower seeks a loan from any financial institution.
  • This loan must be approved between 1st April 2016 and 31st March 2017.
  • The taxpayer must not own another house on the date of sanction.
  • A loan sanctioned for a residential house is less than Rs 35 lakh.
  • The property value is less than Rs 50 lakh.

Both sections allow an assessee to claim a deduction. It is simply a matter of satisfying the conditions under both sections. To begin with, claim tax benefits under Section 24 up to Rs 2 lakh. The next Rs 50,000 of home loan interest can be claimed under Section 80EE. Thus, you will be able to claim Rs 2,50,000 against interest. 

Conclusion

One of the most common long-term investment objectives of Indians is buying a house. EMIs on a home loan consume a considerable amount of one’s income. In other words, the government offers a wide range of tax incentives for residential property under Section 24 of the Income Tax Act. Although section 24 is not an independent part of the income tax act, those provisions have been incorporated in all succeeding income tax acts. Renting out your property can earn you money. Several attractive deductions are available under section 24 of the Income Tax Act when it comes to real estate income. Thus, a rental income will have a lower effective tax rate than an ordinary wage tax. Income from goods is taxed under the Indian Income Tax Act. Whether the property is used for residential use, industrial use, or both, taxes are due. Buildings can be residential, office buildings, shops, factories, halls, etc., as well as land associated with them, i.e., gardens, buildings, playgrounds, and car parks.

According to Section 24, the borrower must pay taxes on rental property income when a borrower owns rental property, which is one of the few sources of income where actual income must be reported. During the lease consideration process, the income that the asset can earn is assessed. Unless one dwelling house is included in the taxable income, all income from private property, leased property, and vacant property (including houses) is taxable as “Income from the Property”.

References

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