income tax

Maximizing Tax Benefits: Understanding Section 24 of the Income Tax Act

Section 24 of the Income Tax Act, 1961: Explained

Section 24 of the Income Tax Act, 1961 provides important deductions on taxes for house owners, especially those who are repaying home loans or receiving rent income. This introduction explains the deductions available, how they are used, and common queries regarding Section 24.

Absolute Exhaustiveness of Section 24 Deductions

Section 24 deductions are comprehensive, and only these deductibles, as stated in this section, are permissible. Taxpayers cannot claim other expenditures such as repairs, collection fees, insurance, ground rent, or land revenue separately. It is crucial to have a correct understanding of this provision to have correct tax planning.

1. Normal Deduction under Section 24(a): 30% of Net Annual Value

  • Flat Deduction: Taxpayers are entitled to a deduction at a flat rate of 30% of the net annual value, which is obtained by subtracting municipal taxes from gross rent.
  • Self-Occupied Properties: There is no standard deduction on self-occupied properties since the annual value thereof is NIL.
  • Purpose: This must be permitted for general repair and maintenance of the house.

2. Interest on Borrowed Capital under Section 24(b)

Home Loan Interest Deduction:

  • For Self-Occupied Properties: Interest on a home loan of up to ₹2 lakh a year can be deducted if the loan is borrowed for buying or building and the house is completed within five years from the date of loan disbursement.
  • For Let-Out Properties: Entire interest paid is deductible without any limit.

Eligible Purposes:

  • Acquisition, construction, repair, restoration, or reconstruction of house property.

Exclusions:

  • Commission or brokerage on arranging the loan is not deductible.
  • Interest on loans to cover municipal taxes or unpaid interest is not deductible.
  • Interest on a new loan to service the principal of the original loan can be allowed, whereas interest on a new loan to service outstanding interest is not allowed.

3. Pre-Construction Interest: Special Treatment

  • Definition: This period begins from the date of loan sanction or start of construction (whichever is later) to March 31, just prior to the year of completion.
  • Deduction Claim: Total interest paid between this period can be claimed as a deduction by taxpayers in five equal parts starting from the year of completion or purchase.
  • Limit for Self-Occupied Houses: The total deduction along with pre-construction interest is limited to ₹2 lakh per year for self-occupied houses.

4. Other Significant Points and Compliance

  • Accrual Basis: Interest can be claimed on an accrual basis, although accounts can be maintained on a cash basis.
  • Multiple Properties: Deductions can be claimed for multiple properties and loans, but within the prescribed limits.
  • Interest Outside India: Interest paid outside India is not allowed as a deduction except when tax deducted at source and remitted, or where an agent is present in India as under Section 163.
  • Return Filing: All such deductions should be supported by proper documents and interest certificates for claiming these.

Recent Amendments (as of 2025)

Up to 2025, there have been no significant amendments to Section 24. The terms and conditions of specified deduction limits remain the same.

  • Loans approved on or after April 1, 1999: The ₹2 lakh limit is applicable in case of completion of purchase or construction within five years; otherwise, this is reduced to ₹30,000.
  • Section 80EE/80EEA: Special deductions to first-time buyers are provided under other provisions and not Section 24.

Frequently Asked Questions (FAQs)

  • Can I avail both interest and normal deductions under Section 24?

    • Both the deductions are admissible in respect of let-out houses. In the case of self-occupied houses, only interest deductions are admissible, subject to ceilings.

  • Is brokerage paid for obtaining a home loan deductible?

    • No, brokerage or commission charges cannot be claimed under Section 24(b).

  • What if my property is not completed within five years of loan sanctioning?

  • The threshold of interest deduction for self-occupied properties reduces to ₹30,000 per year.

  • Can pre-construction interest be claimed?

    • Yes, pre-construction interest can be claimed in five equal portions after completion/acquisition, under the overall threshold on self-occupied properties.

Section 24 of the Income Tax Act offers significant tax relief for property investors and homeowners. It is, nonetheless, essential to adhere strictly to the stipulated deductions and understand the provisions and limitations involved in order to effect proper tax management.