Understand the benefits of Section 24 of Income Tax

The skyrocketing price of properties has led people to opt for home loans to fulfil their dreams of owning their own home. Nonetheless, when planning to take a home loan, knowing all tax benefits to claim under Section 24 of Income Tax Act will be helpful.

Section 24 of the Income Tax Act 1961 allows an individual to claim tax deductions on the total interest paid towards a home loan. A deduction of up to Rs.2 lakh can be claimed by a borrower when filing for taxes.

Benefits of Section 24 of Income Tax

This section will help people to understand the tax deduction benefits of Section 24 applicable to different properties to reduce any tax liability on the interest paid on home loans.

• Interest paid is deductible

The primary benefit of tax deductions under Section 24 is the total interest paid on a home loan deducted from an individual's taxable income. This deduction is only available on the interest component related to a home loan and not the total principal amount. This tax deduction is beneficial in increasing different taxpayers' disposable income.

• Available for self-occupied and rented properties

Another benefit taxpayers get under Section 24 of the Income Tax Act is that it is available for rented and self-occupied properties. If the property is self-occupied, one can claim a maximum deduction of up to Rs.2 lakh per financial year. If the property is rented out, there remains no limit to the amount of interest that can be claimed as a deduction.

• Available for under-construction properties

When a property is under construction, any tax deduction under Section 24 is available, but only after its completion. The interest paid during such period is claimed as a deduction in five equal instalments. It may begin from the financial year when construction of the property gets finished.

• No limit to the number of properties

Section 24 of the Income Tax Act allows its taxpayers to claim the deductions on the total interest paid on home loans for multiple properties. There remains no limit to the number of properties for which tax deductions can be claimed on the interest paid towards a home loan. This also means that if an individual took out a home loan for several properties, they could claim a tax deduction on the interest paid for all of them.

How does Section 24 work?

An illustration of how Section 24 works can be found in the following discussion.

Assume that a person A has taken a home loan of Rs.50 lakh at an 8% interest rate. The interest A has to pay in the first year of the loan is Rs.4 lakh. Here is how Section 24 can help to save the taxes:

• For self-occupied property, A can claim a maximum deduction of Rs.2 lakh per annum. It suggests A can claim a deduction of Rs.2 lakh out of the Rs.4 lakh interest payable, thus reducing A's taxable income. 

• If A rents out his property, then he can claim the entire interest amount on loan as a deduction. 

Other tax-saving options

Apart from Section 24, there are other tax-saving options available under different sections. Section 80 EE is one of them.

This section was introduced in 2013 to provide additional tax deductions to first-time homebuyers. A maximum deduction one can claim is Rs.50000 per annum, but some conditions need to be obeyed:

• House must value at Rs.50 lakh or less.

• Loan must be sanctioned between 01.04.2016 to 31.03.20217.

• Loan amount must not be more than Rs.35 lakh.

• During the date of sanction, the person must not own any other house properties.

If the conditions of both Sections 80EE and 24 get satisfied, the available benefits are:

• Exhaust the deductible limit first under Section 24.

• TClaim the additional benefits under Section 80EE

Understanding income tax calculator and income tax slab

The income tax calculator is a key tool, helping individuals to calculate their tax liability and plan finances accordingly. This calculator currently shows the liability of income tax for the financial year 2022-23, which ends on 31st March 2023 and for the upcoming financial year 2023-24. It also helps to compare the new tax liability under the new and old tax regimes for the two financial years.

The income tax slab under the new tax regime for FY 2023-24 is given below.

• Income from 0 - Rs.3 lakh : 0

• Income from Rs.3 lakh - Rs.6 lakh : 5%

• Income from Rs.6 lakh - Rs.9 lakh : 10%

• Income from Rs.9 lakh - Rs.12 lakh : 15%

• Income from Rs.12 lakh - Rs.15 lakh : 20%

• Income above Rs.15 lakh : 30%

Certain NBFCs and banks provide their patron customers pre-approved loan offers. Opting for such facilities can speed up the loan approval process. Also, implementing Section 24 appropriately will assist them in saving through home loan tax deduction.

Overall, understanding the taxation policies on home loans can help individuals to reduce their tax liability. Taxpayers have to be aware of the income tax slab to plan their tax-saving investments accordingly. Choosing to implement Section 24 of the Income Tax Act will be beneficial to save a huge sum on the interest paid against home loans. 

Such aspects will help a borrower to fulfil their financial goals and attain a new house without creating a hole in their pocket.