While calculating income from house property, deductions are allowed out of net annual value (NAV). The following are the deductions under section 24 which are allowed while calculating house property income:
(1) Standard Deduction [Sec. 24(a)]
It is a flat deduction available out of net annual value in respect of certain expenses of the owner of the house property connected with earning of rental income like rent collection charges, insurance of house, repair of house, etc. It is allowed @30% of 'net annual value'.
Points to be noted
(i) Actual expenses incurred by the owner of house property are not to be considered. The Standard deduction is available even if the owner has not incurred any expense for earning rental income.
(ii) No Standard deduction is allowed in respect of self-occupied house property because net annual value of self-occupied house is taken as NIL.
(2) Interest on 'Housing Loan' [Section 24(b)]
Housing loan means loan taken/amount borrowed for purchase, construction, repairs or renovation, etc. of house property. Interest paid/payable on housing loan is allowed as deduction while computing house property income. It is important to note that while calculating house property income in respect of let out house property/deemed to be let out house property, there is no maximum limit on interest, however, (while calculating house property income) in respect of self-occupied house, there is a maximum limit upto which interest can be claimed as deduction. The tax treatment of interest on housing loan can be explained as follows:
Tax Treatment of Interest on Housing Loan
Let out/Deemed to be let out house
While calculating house property income in respect of such house property, interest on loan taken for purchase/construction/repairs/renovation etc. is allowed as deduction in full. There is no maximum limit in respect of such interest.
Amount of deduction = Actual interest (without any limit)
In case of Self-occupied House
Although net annual value (NAV) is taken as nil in respect of self-occupied house property, yet interest on loan taken for purchase/construction/repairs/renovation etc. of such a house property is still allowed as deduction. The allowability of such interest is a benefit given to individuals and HUFS because it will result into loss under the head house property which can be set-off against other incomes of current 'previous year' or of future 'previous years' as per rules.
MAXIMUM LIMIT ON INTEREST
(1) If loan is taken before 1-4-99. Interest on loan is allowed upto a maximum of 30,000. The purpose of loan may be construction/purchase/repair/renovation/extension, etc.
(2) If loan is taken on or after 1-4-99.
(a) For purchase/construction of house property. Interest on loan is allowed upto a maximum of 2,00,000 provided the following conditions are fulfilled.
- The construction or acquisition of house property is completed within 5 years from the end of the financial year in which capital was borrowed; and
- The borrower obtains a certificate from the lender specifying the amount of interest payable. The certificate must also specify the purpose of loan, i.e., whether the loan was taken for purchase or construction of house or as a refinance of the earlier loan taken for the construction or purchase of the house.
- For repairs etc. or for purchase/construction of house property if such acquisition/ construction is not completed within 5 years as prescribed in point 2(i) above. Interest on loan is allowed as deduction upto a maximum of 30,000.
Treatment of Pre-acquisition/Pre-construction period Interest
Meaning of 'Pre-acquisition/pre-construction period'
It means the period starting from the date of borrowing and ending on March 31st immediately preceding to the year of completion of construction/acquisition.
Interest for pre-acquisition/pre-construction period shall be allowed as deduction in 5 equal installments starting from the previous year in which the house is acquired or the construction is completed and for the next previous years.
If the construction/acquisition of house is completed during a particular previous year then whole interest of that previous year shall be treated as post-construction period interest. In other words, no part of that previous year's interest shall be treated as 'pre-acquisition period interest'.
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