There are several sections in the Income Tax Act that allow you get tax exemptions on specific investments and expenditures. One of the investments that is constantly stressed in the Act is purchase or residential property. The government recognises that housing is one of the most important need as well as asset, and many investments towards your first home are exempted from tax payment.
An important section concerning home loans is Section 24 which allows you to claim exemptions on the interest you pay on home loans. Another section, Section 80C, allows you to claim tax benefits on the repayment of the principal amount.
Section 24 is titled as “Deductions from income from house property”. ‘Income from house property’ is applicable in the following cases:
- If you are renting out your house(s), then the rent received will be considered as part of your income;
- If you have more than 1 house, then the Net Annual Value of the houses, except the house you are living in, will be considered as your income.
If you own only 1 house and you are living in it, the income from house property will be considered as NIL. Any income derived from rent and annual value of additional houses, will be subject to tax after deductions made under Section 24.
Deductions under Section 24:
There are 2 types of deductions under Section 24 of the Income Tax Act:
- Standard deduction: This is an exemption allowed to every taxpayer, where a sum equal to 30% of the net annual value does not come under the tax limit. This is not applicable if you are occupying the only house you own.
Interest on loan: If you have taken a home loan for purchase, construction or renovation of the house, whatever interest you pay on the principal amount of the loan is exempted from tax payment. The sub-clauses in this category are:
- If the loan has been taken for a self-occupied property, then you can claim exemptions of up to Rs. 2 lakh.
- If you took a loan for purchase or construction (not renovation) of a property before actually buying or completing its construction, you can still claim the interest. You can seek deductions on the interest paid before the construction or purchase is completed, in 5 equal instalments, from the year in which the house is bought or the construction is completed.
- If the loan is taken for renovation or reconstruction of a house, you cannot claim tax exemption until the renovation is completed.
To avail this deduction, you need to compute the interest amount you have to pay to the bank or financial institution that you took the loan from, separate from the principal repayment. It does not matter whether you have actually paid the amount to the financier – you can get exemption for the complete annual interest amount.
Exceptions under Section 24:
- If the house is not occupied by you, you can claim exemption for the whole interest amount that you are paying, without any upper limit.
- If the house is not occupied by you because you live in another town due to your employment or business, and you live in another property or rented property in the city of your employment, then you can claim tax exemption on interest payment only up to Rs. 2 lakh.
- There is no deduction for any brokerage or commission for arranging the loan or tenant.
- You have to buy or complete construction of the house within 3 years of taking the loan for you to be able to claim maximum deduction on the loan interest amount. If the construction or purchase is not complete within 3 years, you will be able to claim only Rs. 30,000 instead of Rs. 2 lakh.
- You must have an interest certificate for the loan that you are taking.
Computation of Income from House Property:
Understanding income from house property can be tricky. To make it simple, here are a few things to keep in mind:
- Only the Net Annual Value of your house(s) is considered for taxation. Net Annual Value is arrived at when you deduct the municipal taxes paid on the property from the gross annual value of the house. For example, if you are receiving Rs. 1.2 lakh as rent annually on a house you have let out, and you are paying Rs. 40,000 as municipal taxes, then the Net Annual Value of your house is Rs. 80,000, and you have to pay tax only on this amount.
- If your house(s) is lying vacant for any period during the financial year due to lack of tenants, you have to consider only the income received as rent and not compute it against the whole 12 months. For example, if a house yielding Rs. 17,000 as rent is vacant for 4 months of the fiscal year, then the gross value of the house will be Rs. 1,36,000 (Rs. 17,000 * 8). Tax payable on this income will be calculated after deducting the municipal tax amount paid and the standard deduction of 30%.
- If your house(s) is lying vacant and not giving you any income, but you are paying municipal taxes, you can offset this loss against income from other sources – such as your salary or rent from any other property – during the same fiscal. If you are unable to offset the loss in the same year, you can carry forward this loss for up to 8 years.
Section 80EE allows an additional exemption of Rs. 50,000 if the cost of the house is less than Rs. 50 lakh and the loan taken is less than Rs. 35 lakh. This provision is available only from the financial year 2016-17. An interest point to note is that these tax exemptions are available only to the person in whose name the house and the loans are. If the person dies and the property and loan liabilities are passed on to the heir, the inheritor cannot claim any tax benefits. However, if you have taken a joint loan or own a property jointly with another person, all the parties who are repaying the loan and own the property can claim individual deductions, because Section 24 applies to each individual and not each property.