Interest on Housing Loan Deduction under Income Tax- Section 24
Introduction:
This article is for discussing one of the most important tax incentives that the Government of India allows to the taxpayers. The article talks about the deduction towards interest on housing loan allowed by the Income Tax Act, 1961. Section 24 of the Income Tax Act provides the rules for the maximum deduction allowed against interest on housing loan. Do you want to maximize your tax savings through a housing loan? If yes, this article is for you.
What is Income from House Property?
- According to the Income Tax laws, the income derived from letting out any property (residential/ commercial) is taxable under the head “Income from House Property”.
- However, if a property is self-occupied, its rental value shall be “Nil” from the Income Tax point of view.
What are the deductions allowed under Income from House Property?
Following are the deductions allowed under the head “Income from House Property”:
- Deduction for Municipal Tax: If any municipal taxes (House tax etc.) are paid by the owner or are borne by the owner during any financial year, he shall be allowed the deduction of such taxes paid. Municipal taxes so paid shall be deducted from the Gross Annual Value of the property to derive the “Net Annual Value”.
- Standard Deduction from house property income: 30% Adhoc deduction is allowed from the net annual value of the house property. This deduction is towards expenditure for maintenance and other expenses related to the house property irrespective of the actual amount of expenditure.
- Deduction of interest on housing loan: Deduction of up to Rs. 2 Lakhs is available for interest paid towards the loan taken for any property which is occupied by any person for his own residence or for his family. But in case the said property is let out, the entire amount of interest shall be allowed as an eligible deduction under section 24. It is equally important to claim the deduction for interest by filing itr online.
What is Section 24 of the Income Tax Act?
Section 24 of the Income Tax Act provides the deductions available from the income from house property. Section 24(b) of the Act contains the provisions of deduction of interest on housing loan. The purpose of the loan may be towards the purchase or construction or repair or reconstruction of the house property.
For claiming the deduction towards interest on a housing loan, the person must be the owner of the property and the loan should be in his name. One of the most important things to note is that the deduction u/s 24 is allowed on an accrual basis. In simple words, you can claim the deduction towards interest payable for the financial year even if the interest is not actually paid or not. There is no restriction for claiming the deduction for interest for more than one housing loan.
What are the charges included in the interest for the purpose of section 24?
Besides the interest on housing loan, the following other charges are also considered as “Interest” for the purpose of allowing deduction u/s 24b:
- Processing Fee
- Pre-Payment Charges
- Interest on the second loan which was used to repay the original housing loan
What are the charges not included in the interest for the purpose of section 24?
The following charges are not included in the definition of interest for the purpose of section 24 of the Income Tax Act:
- Brokerage or Commission for the arrangement of loan [Circular No. 28, dated 20.08.1969]
- Penalties on default of installment payment
- Penal Interest on failure to pay installments timely
What are the types of loans in which deduction is allowed u/s 24?
This question becomes very important as we are using the words “housing loan” since the beginning of this article. Please note that the deduction is allowable u/s 24 irrespective of the nature of the loan whether it is a housing loan or loan against property (LAP) or a personal loan from any person/ institution. The important thing is that there should be a clear nexus (connection) between the loan borrowed and the acquisition, construction, repairs, or reconstruction of the property out of the borrowings and interest paid on it.
To make it simple, interest on a housing loan is allowed as a deduction under section 24(b) even if the loan is not taken from a bank or financial institution but from an individual. However, section 80C deduction shall be available only where repayment of the principal amount is made against a loan taken from a bank or financial institution.
What is the maximum limit of deduction for interest on housing loan?
|
Nature of Property |
Maximum permissible deduction |
|
Let-out property or Deemed let-out property |
Actual interest incurred on borrowed capital for the purpose of acquisition, construction, repairing, or reconstruction |
|
Self-occupied residential house property |
Interest incurred on capital borrowed for the purpose of acquisition or construction of house property shall be allowed as a deduction up to Rs. 2 Lakhs. The deduction will be allowed only if the loan is taken on or after 01-04-1999 and acquisition or construction is completed within 5 years. |
|
Self-occupied residential house property |
Interest incurred on capital borrowed for the purpose of reconstruction, repairs, or renewals of a house property shall be allowed as a deduction up to Rs. 30,000 only. |
Note:
- Any interest belonging to the period prior to the year of acquisition/ construction of the house property shall be allowed as a deduction in 5 equal installments, beginning with the year in which the property was acquired/constructed.
- If the loan is taken before 01-04-1999 for the purpose of purchase or construction of a house property, the deduction for interest will be limited to Rs. 30,000.
|
With effect from A.Y. 2020-21, the deduction for interest paid or payable on borrowed capital shall be allowed in respect of two self-occupied house properties. However, the aggregate amount of deduction shall not be more than Rs. 2 Lakhs or Rs. 30,000, as the case may be. |
How to calculate pre-construction interest for the purpose of section 24?
- As discussed in the previous question, interest for the pre-acquisition/ pre-construction period is allowed in 5 equal installments beginning from the year of completion of the house property.
- Pre-construction/ Pre-acquisition period is computed from the date of taking the loan and up to the last day of the financial year preceding the financial year in which the construction/ acquisition is completed.
For example: A loan is taken on 01-06-2017 and construction is completed on 18-08-2021. In this example, the pre-construction period will be taken from 01-06-2017 to 31-03-2021.
How to calculate the deduction for housing loan in the case of a co-borrower?
If the housing loan is taken in joint names, then each co-borrower will be eligible to take the benefit of deduction of interest on the housing loan in proportion to his share in the loan. It is also important to note that the maximum deduction limit of Rs. 2 Lakhs/ Rs. 30,000 shall be available to each co-borrower separately.
Other important points:
- Obtain Interest Certificate from the bank or financial institution or the lender before claiming a deduction under section 24(b).
- File income tax return online timely to claim the deduction.
