How Section 24 of Income Tax Act Makes Your Income-Tax Free

Section 24 of Income Tax Act 1961-The Deciding Factor Between Old Vs New Tax Regime

Section 24 of Income Tax Act 1961

Owning a house is like a dream for everyone especially in India. This is considered as a big-ticket purchase. Therefore, to make this dream a reality, the Government allows standard deduction Under section 24a and home loan tax benefit under section 24b of Income Tax Act,1961 to the homeowners.

Section 24 of Income Tax Act 1961 basically deals with the accrual of income from house property. Section 24 of the IT Act has been enacted in such a way that a homeowner can avail maximum home loan tax deduction while investing a substantial amount for owning a home and paying interest on home loan.

Therefore, it would not be very wrong, if I say that G.O.I help indirectly to the homeowners to ease the pain of having a big-ticket purchase.

Section 24 of Income Tax Act 1961

Section 24 of the IT Act 1961 is related to income from house property and tax benefit on home loan. This Act is a combination of two sections i.e. Section 24(a) and Section 24(b).

After budget 2020, Section 24 of Income Tax Act plays a significant role in deciding the tax regime whether Old or New which tax regime is beneficial for you.

Therefore, while choosing the tax regime for filing income tax return, it is very important to know the implications of Section 24 of the I.T Act,1961 in reducing your overall income tax liability.

You May Read The Following:

Standard Deduction Under Section 24a for computation of Income from House Property

  • Deduction Under Section 24a:

Section 24a deals with the deduction from the Net Annual Value(NAV) while computing income from house property.

It means Section 24 not only allows income tax rebate on a home loan but also allows a standard deduction from the Net Annual Value(NAV) if you have given your residential property on rent.

Points to Remember:

  • Income from the house used for own residential purpose is considered as NIL as you can not claim rent on the self-occupied house.
  • For let out property, rental income is charged as Income From House Property.
  • For more than one self-occupied house property, the Net Annual Value is taxable under the head Income From House Property.

For let out property on which rent is receivable by the homeowner, Section 24a allows a deduction of 30% from the Net Annual Value for the following expenses incurred by the assessee.

  • Maintenance charges;
  • Repairs;
  • Electricity;
  • Fire insurance premium;
  • Depreciation.

Standard deduction @30% is allowed on logical grounds and therefore, no further expenses are permissible for deduction under this head.

Before knowing the computation of Income from House Property, the following points are worth knowing.

  • Annual Value: Annual value refers to the reasonable rent earning capacity of the property if it is let out during the year. Income from house property is calculated based on the annual value.
  • Municipal Value: This value is derived by the Municipal Corporation and followed as the minimum rent to be earned from a rented property as prescribed by the Municipal Authorities.
  • Fair Rent Value: This value can be derived by considering the rent fetched or receivable by other similar property in the same or similar locality/area.
  • Standard Rent: Standard rent is the maximum rent that a landlord can recover in a legitimate way from his tenant as prescribed by the Rent Control Act.
  • Actual Rent Received: The actual rent amount that the homeowner has received from the tenant.
  • Computation of Gross Annual Value (GAV): Gross Annual Value is the highest value determined from the following three elements:
    • Municipal Value
    • Fair Market Value
    • Actual Rent Received

Computation of Income from House Property

Example: Sri Amit Vyas has let-out his residential property for the A.Y 2020-21 on a monthly rent of Rs.40,000/-. The Municipal Value is Rs.5 Lakh. The Fair Rent of the property is Rs.4.50 Lakh. Standard Rent is Rs.4.75 Lakh. Municipal Tax paid Rs.50,000/-. Compute his total Income From House Property.

Computation of Income From House Property (Rs. in Lakh)

Municipal Value (A)    5.00
Fair Rent (B)    4.50
Actual Rent Received(C) 4.80
Higher of above three (A)/ (B)/ (C) – (D)    5.00
Standard Rent (E)    4.75
Gross Annual Value-Lower of (D) and (E)    4.75
Less: Municipal Taxes paid    0.50
Net Annual Value(NAV)    4.25
Less: Standard Deduction U/S 24a @ 30% of NAV    1.28
Income from House Property    2.97

Section 24b of Income Tax Act-Home Loan Tax Exemption

Section 24b of Income Tax Act 1961 deals with home loan tax benefit. To ease the pain of paying interest on housing loans, Section 24b allows a deduction in the form of tax benefit on a home loan while computing the Income from House Property if the following conditions are satisfied.

Criteria for Home Loan Tax Benefit Deduction Under Section 24b of Income Tax Act

The following criteria must be satisfied in order to be eligible to get a home loan tax exemption.

  • Purpose of Loan: The home loan must be taken for the purchase and/or construction of the residential property only. The purchase or construction must be for a residential property whether for self-use or for let out but not for a commercial purpose;
  • Loan date: The loan has to be taken on or after 1st April 1999;
  • Completion: The purchase or the construction of the house for which the home loan has been taken must be completed within 5 years from the end of the financial year in which the loan was taken;
  • Ownership: The house must be registered in the name of the assessee singly or jointly with others. It means the assessee must be an owner or co-owner;

Amount of Home Loan Tax Benefit as per Section 24b of Income Tax Act

  1. Rs.30,000/- If the above conditions are not satisfied: As per Section 24 of Income Tax Act, the interest on housing loan deduction is restricted to Rs.30,000/- in a financial year if all of the above conditions are not satisfied.
  2. Rs.2,00,000/- when all conditions are met: Maximum deduction under section 24b one can avail is Rs.2,00,000/- in a financial year when all the above conditions are met. This tax benefit on a home loan is applicable both for the self-occupied and let-out property. Earlier for the let-out property, there was no limit on the income tax exemption on interest payment oh house building loan, but now it is capped to Rs.2.00 Lakh only.
  3. Pre-construction period interest: The home loan tax benefit for under construction/pre-construction period i.e. interest amount paid before construction of the house or taking possession of the residential flat is eligible for home loan tax exemption equally for 5 years (1/5th every year within max limit of Rs. 2 Lakh) from the year in which the construction gets completed.
Home Loan Tax Benefit as per Section 24b of Income Tax Act

Income Tax Rebate on Home Loan U/S 80EEA

In 2019 the G.O.I have planned a mission of “ Housing for all by 2022″. To accomplish that mission, they introduced a new Section called 80EEA to provide additional home loan tax benefit to the first time home buyers under an affordable housing scheme.

In budget 2020, this tax benefit has been extended up to 31.03.2021. This means loan taken up to 31.03.2021, is eligible now to claim deduction under this section.

As per the provisions of Section 80EEA, the first time home buyers can now avail additional home loan tax benefit of Rs.1.50 Lakh in a year over and above the limit of Rs.2 Lakh as envisaged under Section 24b of Income Tax Act if the following conditions are satisfied.

Conditions for Tax Benefit on Home Loan U/S 80EEA

First time home buyer: At the time of taking loan under the affordable housing scheme, the borrower must not own any other house property in his name. So, to claim deduction U/S 80 EEA you need to be a first time home buyer;

Loan sanction period: To claim deduction under this section the loan must be sanctioned between 01.04.2019 to 31.03.2021 only;

Who can claim: Only individual assessee can claim deduction under this section;

Loan taken from: Section 80EEA allows income tax rebate on home loan only when loan is borrowed from Banks, Financial institutions only. Loan from others is not permitted here for tax exemption.

Interest amount: Maximum amount of additional deduction that can be availed of is Rs.1.50 Lakh, which is over and above the tax benefit on home loan U/S 24b.

Property Registered value: The most important condition laid down by this section is that the stamp value of the property should not exceed Rs.45 Lakh. If it exceeds the value as notified, the home buyer is not eligible to claim deduction under this section.

Income From House Property Problems And Solutions

Example: Sri Vinay Pathak has let-out his residential property for the A.Y 2020-21 on a monthly rent of Rs.50,000/-. The Municipal Value is Rs.6.50 Lakh. The Fair Rent of the property is Rs.5.50 Lakh. Standard Rent is Rs.5.25 Lakh. Municipal Tax paid Rs.60,000/-.

Interest on home loan paid Rs.2,30,000/-.Compute his total Income From House Property considering the house is (a). self-occupied and (b). a let-out. Also, compute interest amount U/S 80EEA if the loan is taken between 01.04.19 to 31.03.21.

Computation of Income From House Property (Rs. in Lakh)

Type of House PropertySelf-Occupied Let Out property
Municipal ValueNIL6,50,000
Fair RentNIL5,50,000
Actual Rent ReceivedNIL6,00,000
Higher of above three (A)NIL6,50,000
Standard Rent (B)NIL5,25,000
Gross annual value (lower of A and B)NIL5,25,000
Less: Municipal taxes paid to the local authorities NIL60,000
Net Annual Value (NAV)NIL4,65,000
Less: Standard deduction (@30% of NAV)NIL1,39,500
Income Chargeable to Tax (NAV -SD @30%)NIL3,25,500
Less: Interest paid on Home Loan
(Max 2 Lakh as per Section 24b)
(2,00,000)(2,00,000)
Total Income from House Property(2,00,000)1,25,500
Eligible Home Loan Tax Benefit Deduction
Under Section 24b of Income Tax Act
200,000200,000
If Loan Taken within 01.04.19 to 31.03.21,
eligible home loan interest U/S 80EEA
30,00030,000

Section 24 of Income Tax Act 1961-The Deciding Factor Between Old Vs New Tax Regime

As you all know that as per the Budget 2020, one can choose between the tax regime i.e. old and new, in which one wants to file his income tax return. Once chosen can not be changed in that financial year. Next year again you can choose your preferred tax regime.

If you choose the new tax regime, you have to forgo all income tax deductions here. Income tax deductions are only allowed in old tax regime.

But if you study thoroughly you would find that Section 24 of Income Tax Act 1961 plays a decisive role here. The old tax regime is beneficial for income up to a certain level and vice-versa.

So, while deciding which tax regime to choose you must consider the deduction under Section 24 of Income Tax Act. I will show you a comparative study between the two different tax regimes below.

Comparison between two Tax Regime Old Vs New

So, from the above comparison, you can check that if you have paid interest on the home loan, your tax liability will be much lower in the old tax regime as compared to the new tax regime.

So, it can be said that Section 24b of Income Tax Act plays a significant role in reducing your total tax liability.

Excel Income Tax Calculator With Comparison Download Below

No Responses

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.