Thursday, January 31, 2019

Deduction of Interest on Home Loan Under Section 24 of the Income Tax Act 1961

There are a number of sections in the Income Tax Act 1961 under which individual taxpayers or HUFs can claim deductions from their taxable income to bring down their income tax liabilities. Those sections are Section 24, Section 80C, Section 80D, Section 80E, Section 80G and Section 80TTA. 

Section 24 of Income Tax Act 1961

Under Section 24 of the Income Tax Act 1961, deduction can claimed by taxpayers from the Net Annual Value of the House Property. Net Annual Value of the House Property is arrived upon deducting municipal taxes paid from the Gross Annual Value of the Property. In case of let out property, annual rent is Gross Annual Value of the Property. 

Standard Deduction

  • Standard deduction of 30% of the Net Annual Value is allowed under the Section 24 of Income Tax Act. Even in the actual expenditure is higher or lower than the limit of 30% net annual value, a taxpayer can claim deduction of 30% of net annual value only.
  • Standard deduction includes expenditure on insurance, repairs, electricity, water supply etc. 
  • For a self occupied house property, the Annual Value is Nil. So the standard deduction for self occupied property is also zero.

Deduction of Interest on Home Loan for the Property

Under this section, taxpayers can claim deduction up to Rs. 2,00,000 from their taxable income on interest payment on their home loan on their self occupied property. But if the property is let out, taxpayers can claim deduction on the entire amount of interest component of the home loan. However, they have to satisfy the below conditions: 
  • The home loan had been taken for the purchase and construction of a property; 
  • The home loan was taken on or after 1 April 1999; 
  • The purchase or construction of the property was completed within 5 years from the end of the financial year in which the loan was taken. 

Deduction on Pre-Construction Interest Payment 

Under the Income Tax Act 1961, taxpayers can avail tax benefit on the pre-construction interest payment. Taxpayers can claim deduction on pre-construction interest only after the construction of the property has been completed. The total pre-construction interest paid is deductible in 5 equal installments in subsequent years for next five years.

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