In India, rental income from house property is charged under the head “Income from House Property.” However, before the income is taxed, certain deductions are allowed under Section 24 of the Income Tax Act, which can reduce the taxable income. These deductions help ease the tax burden on property owners and encourage investment in real estate. Let’s break down the key deductions available.
1. Standard Deduction – 30% of Annual Value
The first and most straightforward deduction available is a flat 30% of the annual value of the property. The annual value is essentially the rent that could be reasonably expected to be received from the property, or if the property is self-occupied, it is the value deemed by the Income Tax Act.
This 30% deduction is meant to cover expenses related to the property such as maintenance, repairs, and other necessary upkeep. This deduction does not depend on the actual expenses incurred by the owner.
2. Interest on Borrowed Capital
If a property is acquired, constructed, repaired, renewed, or reconstructed with borrowed capital (loan), the interest paid on that loan is also deductible. This can be a significant benefit for property owners who have financed their property through loans.
- Limitations on Deductions:
- For self-occupied property, the deduction for interest paid on borrowed capital is capped at Rs. 30,000.
- However, if the property was acquired or constructed with a loan taken after April 1, 1999, and the construction or acquisition is completed within five years, the maximum deduction on interest paid can go up to Rs. 2 lakh.
Explanation of Interest Deduction
For property acquired or constructed with borrowed capital, interest payable on the borrowed amount for the period prior to the previous year in which the property was acquired or constructed is also deductible. This amount is spread out over five years, starting with the year of construction or acquisition.
Certificate Requirement
To avail the deduction under this provision, the property owner (assessee) must submit a certificate from the person to whom the interest is payable. This certificate should detail the amount of interest payable by the assessee for the purpose of acquiring or constructing the property. Additionally, if any part of the capital borrowed has been repaid through a new loan, this must also be declared, as the new loan is treated as part of the original borrowed capital for deduction purposes.
Note: The combined deductions under the provisions of interest on borrowed capital (Section 24(b)) are capped at Rs. 2 lakh under both the first and second provisos.
3. Interest on Loans Taken for Property Construction
The explanation clarifies that the term “new loan” refers to any subsequent loan taken by the assessee to repay the original borrowed capital. If part of the original loan is repaid with a new loan, the interest on the new loan is considered in the same manner for deduction purposes.
Conclusion
Section 24 of the Income Tax Act offers property owners substantial deductions against their rental income. The standard deduction of 30% is straightforward, while the interest on borrowed capital deduction offers a significant tax benefit, especially for individuals who have financed their property purchases or construction with loans. Property owners must ensure they meet the conditions, including submission of necessary certificates and documents, to claim these deductions.
By understanding and utilizing these deductions properly, property owners can reduce their taxable income and thus minimize their tax liabilities effectively.
