Owning a house is our biggest dream. But real estate prices are rising even in metropolitan areas and even tier 2 cities. Pursuant to Section 24B of the Income Tax Act, the Government has introduced several measures to reward everyone who invests in real estate by providing relief through various tax breaks on the purchase of real estate.
What is Section 24B?
Section 24B of income tax act allows the deduction of home loan interest from taxable income. Such loans should be for the purchase, construction, repair, and reconstruction of homes. Such deductions are on an accrual basis. A taxpayer can claim deduction for two or more housing and home loans. To claim a deduction under this section, the person must be the owner of the house and the loan must be in the name of the owner.
What is the maximum limit of 24B?
The deductible limit for loan interest is INR 2,00,000.
This applies to both rental apartments and self-occupied residential properties. Those who own two self-occupied house properties can claim interest deductions.
However, the Rs.200,000 deduction limit may be reduced to Rs.30,000 if:
- If a person borrowed a loan to buy or construct a new house property before April 1, 1999.
- A taxpayer borrowed a loan to make repairs or renovations to an existing home on or after April 1, 1999.
- If a person borrowed a loan on or after April 1, 1999, and the construction of the house is not completed within 5 years from the end of the year in which the loan was taken.
What is the interest for the pre-construction/ acquisition period?
Interest for the pre-construction/acquisition period is permissible in five equal installments from the year of the completion of the house property. This deduction is not allowed if the loan is for repairs, renovations, or alterations.
The pre-construction/acquisition period begins on the borrowing date and ends on the last day of the previous financial year when construction is completed.
How to Calculate Tax Under Section 24B?
Let’s look at an example for calculating tax deductions in section 24B of the Income Tax Act.
Ms. Simar earns an annual salary of ₹ 15,00,000. Apart from that, she earns Rs 3,000,000 in rental income. On 24th June 2021, she borrowed a loan with an interest portion of INR 2,50,000 in one financial year. She has invested in a tax savings program, the maximum deductible for Section 80C is Rs 1,50,000 and the maximum deductible for Section 24B is Rs 2,00,000.
Now the calculation looks like this:
| Particulars | Amount |
| Annual salary | 15,00,000 |
| Add: Rental income | 3,00,000 |
| Total annual income | 18,00,000 |
| Deduct: Deduction on interest paid for a home loan under Section 24B | 2,00,000 |
| Deduct: Deduction under Section 80C | 1,50,000 |
| Taxable income | 14,50,000 |
Note that individuals must follow the old tax regime to claim tax deduction under Sections 24B and 80C. Here, the taxable income is ₹ 14,50,000. As per the old tax regime tax liability:
| Income Tax Slab | Tax Percentage | Tax Amount (in INR) |
| Up to Rs 2.5 lakh | NIL | NIL |
| Rs 2,50,001 to Rs 5 lakh | 5% | 12,500 |
| Rs 5,00,001 to Rs 7.5 lakh | 20% | 50,000 |
| Rs 7,50,001 to Rs 10 lakh | 20% | 50,000 |
| Rs 10,00,001 to Rs 12.5 lakh | 30% | 75,000 |
| Rs 12,50,001 to Rs 15 lakh | 30% | 60,000 |
Hence, total tax liability = ₹ (12,500+50,000+50,000+75,000+60,000) = ₹ 2,47,500.
Section 24B of the Income Tax Act allows individuals to reduce their tax liability by claiming tax credits on interest paid on loans used to purchase or renovate the house.
What is the Deduction in case of a Co-borrower?
If the home loan is joint, each co-borrower is liable to a deduction in proportion to their share of the loan. To make such a deduction, the co-borrower must also be a co-owner of the property. If the assessee was a co-owner but paid off the loan in full himself, he can claim the full interest deduction paid. Owner-occupied property deductible limits apply to each co-tenant individually.
What is difference between 24B and 80EE?
Section 24B allows an individual to claim a deduction of Rs.2 lakhs for self-occupied property. In addition, in the case of rental properties, all interest is deductible.
An additional deduction of Rs 50,000 is for individuals under Section 80EE.
However, it can only be claimed after 2 lakh rupees from Section 24B have been exhausted. Intended for first-time home buyers. Financial institutions must approve loans between April 1, 2016, and March 31, 2017.
What is difference between 24B and 80C?
Section 24B:
- Tax Deduction is allowed only on the interest amount.
- Tax is deducted on an accrual basis.
- The amount of Deduction for the self-occupied property is Rs. 2,00,000 (From the assessment year 2015-16).
- Other than Self-occupied property: No limit.
- Loan is for purchase, construction, repair, renovation, and renovation of houses.
- Eligibility for claiming Tax deduction: Purchase and construction must be completed within 3 years.
- Deduction during construction period: Interest paid during the construction/acquisition period is payable in five equal installments from the end of the previous financial year in which construction is completed.
Section 80C:
- Tax Deduction is allowed only on the principal amount.
- Tax is deducted on a cash basis.
- Amount of Deduction is Rs. 1,50,000 (From the assessment year 2015-16)
- Loan for Purchase or Construction of a new House Property.
- Restriction on Sale of Property: If the property is sold within five years of the end of the financial year in which the property was acquired from him, the claimed tax deduction will be reversed.
- Deduction during the construction period: Principal repayment is not deductible during the construction/acquisition period.
Frequently Asked Questions (FAQ)
Can I claim both 24b and 80C?
Yes, taxpayer can claim 24B and 80C at the same time. Home loan interest is chargeable under Section 24 and the principal is repayable under Section 80C.
Can I claim both 24b and 80EE?
Yes, you can claim both Section 24 and Section 80EE tax benefits in one year.
Can 24b deduction be claimed in the case of commercial property?
Taxpayers cannot take advantage of the interest deduction until the construction of the property is completed.
Is unpaid interest tax deductible under Section 24B of the Income Tax Act?
No, an individual cannot claim a tax credit for unpaid interest under Section 24B
Wrapping Up
Buying your own home is a dream for many and fortunately, the government encourages it. Knowing the different schemes that offer tax deductions as a homeowner can help you plan your taxes better.