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Section 24 of the Income Tax Act: Understanding Deductions for Homeowners

Section 24 of the Income Tax Act provides deductions for homeowners on interest paid for housing loans, offering up to ₹2 Lakh per annum for self-occupied properties.

  • 1,646 Views | Updated on: Jun 06, 2024

The Income Tax Act of India contains several provisions aimed at providing relief and incentives to taxpayers. One such provision, Section 24, pertains specifically to homeowners and offers deductions related to the interest paid on housing loans.

Key Takeaways

  • Section 24 offers deductions on interest paid for housing loans.
  • Homeowners can claim up to ₹2 lakh per annum for self-occupied properties.
  • There’s no upper limit on deductions for let-out properties.
  • Loans must be from recognized financial institutions.

Understanding this section is crucial for homeowners looking to optimize their tax liabilities.

Overview of Section 24 of the Income Tax Act

Sec 24 of the Income Tax Act of 1961 holds significant importance for individuals who own residential properties and have availed of housing loans. This section provides valuable deductions on the interest paid on housing loans, thereby offering relief to taxpayers and promoting homeownership.

Understanding the Purpose of Section 24

Section 24 of the Income Tax Act primarily deals with the deduction of interest on housing loans. The purpose of this section is to provide tax relief to individuals who have taken out loans for the purpose of purchasing, constructing, repairing, or renovating a residential property. By allowing taxpayers to deduct interest paid on housing loans from their taxable income, Section 24 aims to incentivize homeownership and promote investment in the housing sector.

Deductions Under Section 24 for House Property Owners

Owning a house is not just about having a roof over your head; it also comes with tax benefits that can significantly reduce your overall tax liability. Section 24 of the Income Tax Act provides various deductions for house property owners, offering relief on both rental income and home loan repayments.

Tax Deduction on Rental Income

For individuals who own properties that are let out, Section 24 offers a valuable tax deduction on the interest paid on the housing loan. The entire interest amount paid on the loan for the property can be claimed as a deduction from the rental income earned from that property. This deduction helps offset the taxable rental income, thereby reducing the tax burden on the property owner.

Tax Benefit on Home Loan Repayment

One of the most significant tax benefits for house property owners is the deduction available on the interest paid on home loan repayments. Under Section 24(b) of the Income Tax Act, individuals who have taken out a housing loan for a self-occupied property can claim a deduction of up to ₹2 lakh per annum on the interest paid on the loan. This deduction under sec 24 is available for the entire duration of the loan repayment period, providing substantial tax savings for homeowners.

Pre-construction Interest Deduction

In addition to the deduction on interest paid during the period of occupancy, Section 24 also allows for the deduction of pre-construction interest. This deduction is available for the interest paid on the housing loan during the period of construction or acquisition of the property. The pre-construction interest can be claimed in five equal instalments starting from the year in which the construction of the property is completed or the loan is taken, whichever is earlier. This provision helps ease the financial burden on homeowners during the initial stages of property acquisition or construction.

Maximizing Tax Benefits

To maximize tax benefits under Section 24, house property owners should ensure timely repayment of their housing loans and maintain accurate records of interest payments. It’s essential to utilize the deductions available under this section effectively to minimize tax liability and optimize financial planning.

Additionally, individuals planning to invest in residential properties should consider the tax implications and benefits associated with home loan repayments and rental income. Understanding the provisions of Section 24 can help prospective property owners make informed decisions about their investments and financial goals.

Computation of Income from House Property

Income from house property is a crucial component of many taxpayers’ overall income, particularly for those who own residential properties that are rented out or self-occupied. Understanding how to compute income from house property is essential for taxpayers to fulfill their tax obligations accurately.

Gross Annual Value (GAV)

The first step in computing income from house property is determining the Gross Annual Value (GAV) of the property. GAV represents the potential annual rent that the property could fetch if it were rented out at the prevailing market rates. In the case of a self-occupied property, GAV is nil. However, for properties that are let out, GAV is typically determined based on the actual rent received or the municipal valuation, whichever is higher.

Deductions Allowed

Once the GAV is determined, certain deductions are allowed to arrive at the Net Annual Value (NAV) of the property. These deductions include municipal taxes paid during the year on the property and a standard deduction of 30% of the NAV to account for repairs and maintenance expenses. The resulting NAV represents the annual income from the property before considering interest on housing loans.

Interest on Housing Loan

In the case of a self-occupied property, taxpayers can claim a deduction for interest paid on housing loans under Section 24 of the Income Tax Act. The maximum income tax return allowed is ₹2 lakh per annum. If the actual interest paid exceeds this limit, the excess amount can be carried forward for up to eight subsequent years for set-off against future income from house property.

For properties that are let out, the entire interest paid on the housing loan can be claimed as a deduction from the NAV, without any upper limit. This deduction helps offset the taxable rental income, thereby reducing the tax liability on the property owner.

Computation of Income

Once the deductions for municipal taxes, standard deduction, and interest on housing loan are accounted for, the taxable income from the house property is computed. For self-occupied properties, the taxable income is nil if the NAV after deductions is negative. However, for properties that are let out, any positive NAV after deductions is included in the taxpayer’s total income and taxed at the applicable slab rates.

Exceptions and Conditions under Section 24

Section 24 of the Income Tax Act provides valuable deductions for individuals who have taken out housing loans for the acquisition or construction of residential properties. While this section offers significant tax benefits, it also includes certain exceptions and conditions that taxpayers must be aware of to maximize their tax savings effectively.

Self-occupied Property

For individuals who own self-occupied properties, Section 24 allows a deduction of up to ₹2 lakh per annum on the interest paid on housing loans. However, to claim this deduction, certain conditions must be met. The property must be self-occupied by the taxpayer or family members for residential purposes, and the loan must be taken out for the purpose of acquiring or constructing the property.

Let-out Property

In the case of properties that are let out, the entire interest paid on the housing loan can be claimed as a deduction from the rental income earned from the property. Unlike self-occupied properties, there is no upper limit on the deduction for let-out properties. Taxpayers must ensure that the property is genuinely let out and that rental income is declared accurately to claim this deduction.

Pre-construction Interest

Section 24 also allows for the deduction of pre-construction interest, which is the interest paid on the housing loan during the period of construction or acquisition of the property. Taxpayers can claim this deduction in five equal installments starting from the year in which the construction of the property is completed or the loan is taken, whichever is earlier. However, this deduction is subject to certain conditions and limitations.

Completion of Construction

To claim deductions under Section 24, taxpayers must ensure that the construction of the property is completed within a specified timeframe. The completion of construction is essential for availing of deductions for pre-construction interest and for determining the eligibility of the property as self-occupied or let-out.

Other Conditions

In addition to the above exceptions and conditions, taxpayers must comply with other provisions of the Income Tax Act to claim deductions under Section 24. This includes maintaining proper documentation of the housing loan, interest payments, and rental income, as well as adhering to the guidelines laid down by tax authorities.

Additional Aspects Covered under Section 24

Section 24 of the Income Tax Act offers significant relief and benefits for homeowners, providing deductions on interest paid on housing loans and other related expenses. In addition to these primary provisions, Section 24 also covers various additional aspects that homeowners should consider to maximize their tax savings and ensure compliance with tax laws.

Relief and Benefits for Homeowners

One of the primary benefits of Section 24 is the relief provided to homeowners through deductions on interest paid on housing loans. Homeowners can claim a deduction of up to ₹2 lakh per annum on the interest paid on housing loans for self-occupied properties. For properties that are let out, there is no upper limit on the deduction for interest paid on housing loans, providing substantial tax relief for homeowners.

Calculation of Stamp Duty and Registration Charges

In addition to interest on housing loans, Section 24 also covers deductions for stamp duty and registration charges paid on the acquisition of the property. These expenses are considered part of the cost of acquisition and can be claimed as deductions under Section 24. Taxpayers should ensure accurate calculation and documentation of these expenses to maximize their tax benefits.

Home Loan Prepayment Considerations

Homeowners who choose to prepay their housing loans should consider the implications of prepayment on their tax benefits under Section 24. Prepayment of housing loans reduces the outstanding principal amount, resulting in lower interest payments and potential tax savings. However, taxpayers should evaluate the impact of prepayment on their overall financial situation and tax planning strategy before making any decisions.

Stamp Duty Calculator and Legal Certificates

To accurately calculate deductions for stamp duty and registration charges, homeowners can utilize stamp duty calculators available online or through government portals. These calculators help taxpayers estimate the stamp duty payable based on the property value and location. Additionally, homeowners should obtain legal certificates for stamp duty and registration charges paid to support their claims for deductions under Section 24.

Overview of MahaRERA (Maharashtra Real Estate Regulatory Authority)

For homeowners in Maharashtra, it is essential to be aware of the Maharashtra Real Estate Regulatory Authority (MahaRERA) and its implications for property transactions. MahaRERA is responsible for regulating the real estate sector in Maharashtra and ensuring transparency and accountability in real estate projects. Homeowners should understand the requirements and regulations imposed by MahaRERA when purchasing or selling properties to ensure compliance and avoid legal issues.

Conclusion

Section 24 of the Income Tax Act provides valuable deductions for homeowners, helping them reduce their tax liabilities significantly. By understanding the provisions of this section and meeting the necessary conditions, homeowners can effectively leverage these deductions to their advantage. However, it is advisable to seek professional advice to ensure compliance with tax laws and to maximize the benefits available under Section 24.

FAQs on Section 24 of the Income Tax Act

1

Can I claim both Section 24 and Section 80EE?

No, you cannot claim both Section 24 and Section 80EE simultaneously. Section 80EE provides deductions on interest paid for first-time homebuyers, while Section 24 offers deductions on interest paid on housing loans for all homeowners.

2

Is it possible to claim deductions under both Section 24 and Section 80C?

Yes, it is possible to claim deductions under both Section 24 and Section 80C. Section 24 provides deductions on interest paid on housing loans, while Section 80C offers deductions on principal repayment of housing loans and other specified investments.

3

Where should I declare Section 24 deductions in my Income Tax Return?

Section 24 deductions should be declared in the “Income from House Property” section of your Income Tax Return (ITR), specifically in the schedule for deductions under this section.

4

What is the maximum limit for deduction under Section 24 for self-occupied property?

The maximum limit for deduction under Section 24 for self-occupied property is ₹2 lakh per annum on the interest paid on the housing loan.

5

What is the pre-construction period?

The pre-construction period refers to the period before the completion of construction or acquisition of the property. During this period, interest paid on housing loans can be accumulated and claimed as a deduction in five equal installments once the construction is completed or the loan is taken, whichever is earlier.

6

Can brokerage or commission paid be claimed as a deduction under Section 24?

No, brokerage or commission paid cannot be claimed as a deduction under Section 24. Only interest paid on housing loans and certain other specified expenses, such as municipal taxes and registration charges, are eligible for deductions under this section.

7

Is deduction available on the principal amount of a home loan under Section 24?

No, deduction is not available on the principal amount of a home loan under Section 24. This section provides deductions only on the interest paid on housing loans.

8

Can a deduction be claimed for interest paid on two house properties owned by the taxpayer?

Yes, the deduction can be claimed for interest paid on two house properties owned by the taxpayer. However, the maximum limit of ₹2 lakh per annum applies collectively for both properties if they are self-occupied. There is no upper limit on the deduction for let-out properties.

9

What are the eligibility criteria for claiming HRA and home loan deductions?

To claim House Rent Allowance (HRA), you must be a salaried individual receiving HRA from your employer and paying rent for residential accommodation. For home loan deductions under Section 24, you must be a homeowner who has taken out a housing loan for the acquisition or construction of a residential property.

10

Can co-owners of a property claim tax deductions jointly?

Yes, co-owners of a property can claim tax deductions jointly in proportion to their ownership share in the property. Each co-owner can claim deductions for their respective share of interest paid on the housing loan and other related expenses under Section 24.

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