Comprehensive Guide to Section 24 Deductions for Income Tax in India

Section 24 of the Income Tax Act in India offers valuable deductions for taxpayers owning residential properties. These deductions help reduce taxable income and provide significant financial relief. The key deductions under Section 24 include:

The Standard Deduction (Section 24A)

In accordance with Section 24A, a notional deduction equal to 30% of the Net Annual Value (NAV) is allowed. This deduction is applicable regardless of the type of property—whether it is self-occupied or rented. This provision is designed to offset various expenses incurred to maintain the house.

According to the Inland Revenue Act, Section 24A permits this type of standard deduction, aiming to facilitate the reduction of taxable income by providing relief to taxpayers. Thus, this deduction ensures that the overall tax burden is lightened for property owners.

Deduction for Interest on Home Loans (Section 24B)

Interest on home loans is subject to specific provisions under Section 24B, which allows for significant deductions depending on the nature of the property and its occupancy status.

If the Property is Self-Occupied

For self-occupied properties, the maximum permissible deduction for interest on a home loan is capped at Rs. 2 lakh per financial year. This allowance is conditional and only applies if the taxpayer occupies the property for a portion of the year. If the property remains unoccupied, the entire interest can be claimed as a deduction.

If the Property is Rented Out

Rent out or deemed to be let houses are eligible for a full deduction of the interest paid on the home loan. All interest paid on the loan can be claimed without any upper limit.

Calculating Net Annual Value (NAV)

The Net Annual Value (NAV) is determined by subtracting the municipal taxes paid during the year from the annual rent received or receivable. This value forms the basis for calculating both the standard deduction and the interest deduction.

Expenses Related to Rental Income

For properties that are rented out, expenses related to the property, including repairs, maintenance, and other incidental costs, can be deducted from the rental income to calculate the NAV. This provision ensures a more accurate reflection of the annual income, further benefiting the taxpayer.

Important Points to Note

The 2 lakh cap for self-occupied properties applies only if the property is occupied for a part of the year. Unoccupied properties allow a full interest deduction. If a property is rented out, all related expenses can also be deducted to determine the NAV. These deductions are particularly beneficial for taxpayers owning residential properties, significantly reducing taxable income.

Specific Provisions under Section 24B (Statutory Deductions)

The statutory deductions applicable under Section 24B are outlined for interest on borrowed capital. This section governs the deduction of interest on loans taken for the construction, repairs, renovations, additions, or alterations of a house property.

Allowance for Interest on Borrowed Capital

Interest payable on loans or advances taken for these purposes can be deducted from the NAV. The deduction is allowed on an accrual basis, meaning the current period's interest is fully deductible. Prior period interest, however, is subject to a phased deduction process.

Phased Deduction for Prior Period Interest (Section 24B)

The prior period starts from the date on which the loan is taken and ends with the expiry of the financial year immediately preceding the financial year in which the house is purchased or constructed. Prior period interest is the interest for the years prior to the purchase or construction of the property. This interest is allowed as a deduction in five equal installments, starting with the financial year in which the house was purchased or constructed. For self-occupied or unoccupied houses, the deduction for interest on borrowed capital is limited to Rs. 30,000. However, if certain conditions are met, the assessee can claim a maximum deduction of Rs. 200,000 in respect of interest on borrowed capital: Loan taken on or after April 1, 1999 Loan taken for the purchase or construction of the property House purchased or constructed within 5 years from the end of the year in which the loan was taken Certificate from the lender certifying the amount of interest

Overall, the deductions under Section 24 ensure a favorable tax regime for property owners in India, providing substantial relief and reducing the overall tax burden.