To compute income under the head house property, you have to first check if all the basic conditions as specified in section 22 of the income tax act,1961 are satisfied. If its taxable under the head house property, then before calculating taxable income under this head, you can claim a tax deduction under section 24.
As per section 24 of the income tax act,1961, income chargeable under the head house property shall be computed after making the following two deductions from the net annual value;
- Interest on borrowed capital
- Standard deduction
Tax deduction for Interest on borrowed capital
If the property for which income is determined has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, then interest payable on such borrowed capital is allowed as a tax deduction under section 24 from the net annual value of the house property.
To claim a tax deduction for interest on borrowed capital, you are required to get yearly interest payable on the borrowed amount. It does not matter whether you have paid interest or not during the previous year.
Please note, section 24 does not have any restrictions on the person from whom money has to be borrowed to acquire, construct, repair, renew or reconstruct a house property. This means, tax deduction for interest on borrowed capital can be claimed if money has been borrowed from bank, financial institutions, friends, family members or any other person.
In case of failure to pay installments, bank may levy penal interest in addition to the interest payable on borrowed capital. In such type of cases penal interest paid/payable over and above the regular interest can not be claimed as a tax deduction under section 24.
As discussed above, to claim interest on borrowed capital as tax deduction assessee must take home loan to acquire, construct, repair, renew or reconstruct a house property. This means if you have taken a loan after construction or acquisition of the house property, then such Interest on borrowed capital can’t be claimed as a tax deduction under section 24.
To claim tax deduction assessee should also furnish a certificate from the person from whom the amount is borrowed, specifying the amount of interest payable.
Section 80C Vs. Section 24
Section 80C allow only home loan taken from the bank or financial institutions to claim as a tax deduction. If you have borrowed capital from friends or relatives, then tax deduction under section 80C for the principal repayment of housing loan can not be claimed.
If you have taken home loan from your friends or relatives, then interest payable can only be allowed as a tax deduction under section 24. Principal payment of home loan taken from friends and relatives can not be claimed as a tax deduction under section 80C.
Interest attributable to the period prior to the completion of construction
In case the acquisition or construction of house property is completed in subsequent years out of the money borrowed in earlier years for which interest becomes payable, then interest paid or payable for the period prior to the previous year in which the property is acquired or constructed will be aggregated and allowed in five successive financial year starting from the year in which such acquisition or construction is completed. Please note, interest has to be accumulated till the end of the previous year prior to the year in which the house is acquired or construction is completed.
For example, if the assessee has taken a home loan on 1-May-2015 and completed the construction on 1-May-2018, then the interest for the period starts from 1st May 2015 to 31st March 2018 shall be considered as prior period interest for the previous year 2018-19. Therefore, 1/5th of the total prior period interest is allowed as a tax deduction for the previous year 2018-19.
As per circular number 28 dated 20/08/1969, if a fresh loan has been raised to repay the original home loan taken to acquire, construct, repair, renew or reconstruct the house property, then interest paid or payable on the fresh loan can be claimed as a tax deduction under section 24.
Both pre-construction period interest and regular interest payable after acquisition or construction, can be claimed as a tax deduction under section 24.
Tax Deduction limit when house property is self occupied
In case the house is self occupied, interest on housing loan can be claimed as a tax deduction up to a maximum amount of Rs 2,00,000 if following conditions are met;
- Loan is taken for acquisition or construction of the house property on or after 01.04.1999; and
- Such acquisition or construction is completed within 5 years from the end of the financial year in which capital is borrowed.
If a self occupied house property is kept vacant by the assessee due to employment or carrying on business or profession in any other place, and the assessee occupies any premises not owned by him in the other place,then also above restrictions for tax deduction on interest on borrowed capital applies.
In any other case, i.e. loan is taken for repair, renewal, renovation or reconstruction at any point of time, or the above two conditions are not met, interest on housing loan is allowed as a tax deduction under section 24 subject to maximum limit of Rs 30,000.
Please note, above maximum limit of tax deduction for interest on borrowed capital is allowed only to one self-occupied house property. In case you have more than one self occupied house, then one house based on your choice will be considered as self occupied. For let-out or deemed to be let-out property, the entire amount of interest payable on the home loan is allowed as a tax deduction.
Standard deduction from net annual value
Section 24 allows assessee to claim a fixed tax deduction of a sum equal to 30% of the net annual value in addition to interest on borrowed capital. This means standard deduction will be dependent on the net annual value of the year. For a self occupied house property, standard deduction is 0 as annual value is considered as NIL.
Other than the above two tax deductions, you are not allowed to claim any other tax deduction out of the net annual value to calculate income from house property. For example, following expenses can not be claimed as a tax deduction from house property income;
- Brokerage or commission paid for acquiring the loan.
- Insurance
- Repair and maintenance
- Ground rent
- Power back-up facilities
