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Interest Deduction On Rented House Property | Income Tax Return

Updated on: 23 May, 2024 03:48 PM

Constructing/ purchasing a new house is not an easy task. A common man exhausts all his life’s savings & also takes a home loan to make this dream a reality. Hence, to help the citizens, Income Tax Act provides a deduction of interest paid on home loans under Section 24. This article explores the various aspects of section 24 and its applicability.

Section 24 of Income Tax Act says that if any house is acquired or constructed using borrowed capital. Then interest paid on such borrowed capital is eligible for deduction & the amount of deduction is as follows:

Case Maximum Interest Deduction (Rs)
Capital is borrowed for the purchase & construction of the house. And such a house is purchased/ constructed within 5 years from the end of FY in which capital was borrowed. Rs.2,00,000
Capital is borrowed
  • Before 1/4/99 (for purchase, construction, repair, renewal, reconstruction).
  • On or after 1/4/99 (for repair, renewal, or reconstruction).
  • If any conditions in the first condition are not satisfied.

Now, there are 2 situations when it comes to house property income:

  • Situation 1: Your house property is self-occupied
  • Situation 2: You have rented out the house property

In both situations, the treatment of interest deduction is different. Let us discuss them one by one.

When the House is Self Occupied

If you have taken a home loan to build/purchase a house for your own use, then the interest paid is eligible for deduction.

Generally, in the case of a self-occupied house, the annual value is NIL. Therefore, any municipal taxes paid will not be allowed & standard deduction will also be NIL. The only amount that will be allowed as a deduction shall be Interest on borrowed capital, which will be limited to Rs.2 Lac. This will generate a loss under the house property head, which can be setoff from other head's income.

Now, one important thing to note is regarding the carry forward of interest amount exceeding 2 Lac.

For e.g., in FY 2017-18, you took a home loan of Rs.1 crore & paid Rs.5 lac as interest in the same year. As per Sec 24, only Rs.2 lac will be allowed as interest deduction & this will be setoff from other head income as house property loss. Balance Rs.3 lac will not be allowed to be carried forward & will lapse.

Calculating your income from house property and the deductions available manually can get intimidating. You can use tax2win’s house property calculator for easy and accurate calculation of income from house property and the various deductions available.

When the House is Let-out

The treatment of let-out property is different from self-occupied. In this case, the Gross Annual Value needs to be determined. You can refer to our blog to determine GAV & other related aspects of rented houses.

The additional benefit of renting out the property is that you can carry forward extra loss. In the above example, you can mention the whole amount of Rs.5 las as interest u/s 24. Out of this, only Rs.2 lac will be allowed as a deduction & you can carry forward the excess interest of Rs.3 lac for the next 8 AY’s. In the case of self-occupied property, this loss will lapse.

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Frequently Asked Questions

Q- Can I mention interest amount exceeding Rs. 2,00,000?

If the house is self-occupied, then you can’t mention an amount exceeding Rs.2 lac. In the case of rented property, it is possible to mention an amount more than Rs.2 lac as excess loss will be allowed to be carried forward.

Q- What if my property is self-occupied & not letout?

As discussed above, for self-occupied property maximum amount of deduction is Rs.2 lac. Hence, it is not possible to mention an amount exceeding Rs.2 lac.

Q- I mentioned 'income from rented property' as 'other income' in my ITR. What can be the possible consequences?

As per tax laws, an individual is required to report all sources of income and file ITR using the correct form applicable to him. If he files it using the wrong form, then his filed return will be treated as 'defective', and he will be asked to file a revised ITR using the correct form.

Q- I have 2 houses out of which one is lying vacant and the other is occupied by my family. what tax benefits can I claim on house lying vacant?

You can avail of tax benefits on the second house by claiming it as self-occupied. The notional rent on the second house will be added to your income and will be taxed as per the applicable tax slab. However, you will be allowed to deduct the interest on a home loan from the notional rent.

Q- Can I claim a tax deduction on a self-leased home?

An employee who receives HRA can claim an exemption in respect of rental payments under section 10(13A) of the Income-tax Act, 1961. To avail of the HRA exemption, one must pay rent actually for the rented property.

However, an individual can claim HRA even if it is not a part of a salary under section 80GG of the Act. rental payments under section 80GG of the Act, provided certain conditions are fulfilled.

Q- Can anyone claim the maintenance of a rented house as a loss while computing income tax (while claiming income from the second house)?

No, the assessee cannot claim maintenance of a rented house as a loss while computing income tax.

Q- Can I show that 50% of our rent was received in my wife's name to save income tax? I have completed the house loan, and the house is in both of our names. My wife is a housewife.

Yes, the house is in both of your names, so you must show it in both accounts. It will help you manage your taxes as well. Take care that the amount is also received partly in your and your wife’s account. The TDS must be deducted accordingly.

Q- How will an income from a house property be taxable under the Income Tax Act, 1961, in case the house property is let out but has been vacant for whole/part of the year?

Where the property or any part of the property is let and was vacant during the whole or any part of the previous year and owing to such vacancy, the actual rent received or receivable by the owner in respect thereof is less than the reasonable expected rent than the amount received as rent shall be considered as Gross Annual Value.

Q- My parents own a rental property. They put the house under my name, but they collect the rent all to themselves. What is the impact of this situation on my tax return and how do I get out?

Rental income from property is charged to tax under the head Income from house property in the hands of the owner of the property. The person should be an owner of property while receiving rent, only when it can be shown under the House property head.

Now you are the owner of the house.. Rental income and Expenses must be declared on your income tax return.

Q- Do I have to pay income tax if I am renting my house in India for paying guests?

If you are running a paying guest accommodation in your house, the income from the same, if considered legally, should be declared as your rental income.

Q- Can a commercial property be deemed to be self-occupied under the India's Income-tax Act?

As such, the Income Tax Act does not differentiate between residential and commercial property. Only Property is defined in the Act. A property is residential' or 'commercial' by virtue of its usage. When a commercial property is let out, its rent is taxed under the head Income from House Property since there is no other head of income tax where this rent can be reported and taxed. Self-occupied (commercial or residential) property is also taxed under the house property head.

Q- How does the sharing of rental income by the joint owners of a property work in India?

When a property is jointly owned by two or more persons, each one of them is called a co-owner. Each co-owner can avail their proportion of rent under the house property head and can claim the standard deduction on it.

Q- Can I claim HRA as well as interest on a housing loan for the period of staying in a rented house for 9 months and a loan taken for a self-occupied house for 3 months in the financial year? Both properties are in the same city.

Yes, you can claim an income tax exemption on both the house rent allowance (HRA) and repayment of the home loan. If you are living in a house on rent and servicing a home loan on another property - even if both the properties are located in the same city -you can claim tax benefits for both.

CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.