Tax-related things are complicated to understand but you know what we will understand you in such a way that you will not have any doubt after reading this blog. Let’s get started!
Section 24 of the Income Tax Act, of 1961, deals with deductions for the interest paid on your home loan. Whether you’re buying a new house, building one, or repairing an old property, the interest on your loan can be a big expense. Section 24 provides deductions to help reduce this cost and lower your taxable income.
Applicable to Home Loans: Section 24 applies to interest payments on loans taken for purchasing, constructing, or repairing a property.
Self-Occupied Property: The property you reside in can attract interest deductions under Section 24.
Let-Out Property: If your property is rented out, Section 24 still offers deductions, albeit with some differences in the calculation.
Limit of Deductions: The maximum deduction varies based on the property's status (self-occupied or let-out).
Section 24 allows you to claim deductions on the interest paid on home loans, with different rules for self-occupied and let-out properties.
For self-occupied properties, the maximum deduction allowed under Section 24(b) is ₹2 lakhs per financial year. This deduction applies if:
The home loan was taken on or after April 1, 1999.
The loan was taken for purchasing or constructing a house.
The purchase or construction is completed within five years from the end of the financial year in which the loan was taken.
If these conditions are not met, the maximum deduction is reduced to ₹30,000 per financial year.
For properties that are rented out, there's no maximum limit on the deduction under Section 24(b). You can claim the entire amount of interest paid as a deduction. However, the loss under the head "Income from House Property" that can be set off against other income is capped at ₹2 lakhs.
Section 24 also allows you to claim deductions on the interest paid during the pre-construction period. The total pre-construction interest can be claimed in five equal installments starting from the year in which the construction is completed.
If you have taken a loan for repairing, renewing, or reconstructing your existing property, the maximum deduction allowed is ₹30,000 per financial year.
Let's walk through the calculation process with examples to make it easier to understand.
1. Calculating Deductions for a Self-Occupied Property
Scenario: Suppose you took a home loan of ₹50 lakhs at an interest rate of 8% per annum in April 2021 for constructing a house. The construction was completed in March 2023.
Steps to Calculate:
1. Interest Calculation:
Year 1 (2021-22): Interest = ₹50 lakhs * 8% = ₹4 lakhs
Year 2 (2022-23): Interest = ₹50 lakhs * 8% = ₹4 lakhs
2. Total Interest Paid (2021-23): ₹4 lakhs + ₹4 lakhs = ₹8 lakhs
3. Deduction Allowed:
Since the construction was completed within five years, you can claim a maximum deduction of ₹2 lakhs per year under Section 24(b).
4. Tax Deduction for FY 2022-23: ₹2 lakhs
Scenario: Imagine you have a let-out property with an outstanding home loan of ₹40 lakhs at an interest rate of 9% per annum.
Steps to Calculate:
1. Interest Calculation:
Annual Interest = ₹40 lakhs * 9% = ₹3.6 lakhs
2. Deduction Allowed:
Since the property is let out, you can claim the entire ₹3.6 lakhs as a deduction under Section 24(b).
3. Tax Deduction for FY 2022-23: ₹3.6 lakhs
Scenario: You took a home loan in April 2020, and the construction of the house was completed in March 2023. The total interest paid during the pre-construction period (2020-2023) is ₹6 lakhs.
Steps to Calculate:
1. Total Pre-Construction Interest: ₹6 lakhs
2. Deduction Allowed:
The pre-construction interest can be claimed in five equal installments starting from the year the construction is completed.
Annual Deduction = ₹6 lakhs / 5 = ₹1.2 lakhs
3. Tax Deduction for FY 2023-24: ₹1.2 lakhs
Section 24 primarily deals with deductions rather than exemptions. However, it's essential to differentiate between the two.
Exemption: A specific income that is not subject to taxation.
Deduction: An amount that can be subtracted from your total taxable income, thereby reducing your tax liability.
Section 24 does not provide any exemptions. Instead, it offers deductions on the interest paid on home loans. The deductions reduce your taxable income, thereby lowering your tax liability.
While Section 24 deals with interest on home loans, Section 80C of the Income Tax Act allows deductions on the principal repayment of home loans up to ₹1.5 lakhs per financial year. Combining these benefits can lead to significant tax savings.
| Topic | Details |
|---|---|
| Self-Occupied Property Deduction | Up to ₹2 lakhs per year (subject to conditions) |
| Let-Out Property Deduction | No upper limit, but loss set-off is capped at ₹2 lakhs per year |
| Pre-Construction Interest | Deductible in 5 equal installments starting from the year of construction completion |
| Interest on Repair Loans | Deduction capped at ₹30,000 per year |
| Joint Home Loans | Both co-borrowers can claim deductions, effectively doubling the benefit |
| Important Considerations | Timing of construction, joint loans, rent received, loss from house property, documentation |
Section 24 of the Income Tax Act gives tax benefits to homeowners by allowing deductions on the interest paid on home loans. This helps reduce your taxable income and lowers your tax bill. Whether your property is for personal use or rented out, using Section 24 can lead to significant savings.
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Yes, as long as you meet the conditions outlined under Section 24, you can claim deductions on the interest paid on your home loan, regardless of whether you’re a first-time homebuyer.
Section 24 provides tax deductions on the interest paid on home loans, helping to reduce the taxable income of homeowners.
Yes, you can claim deductions for the entire interest paid on a home loan if the property is rented out.
The loan must be used for purchasing, constructing, or repairing a residential property, and the property must be used for residential purposes.
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