Section 24(b) — Home Loan Interest Deduction

Section 24 of the Income Tax Act governed the computation of income from house property. Clause (b) specifically dealt with the deduction for interest on borrowed capital. The provision recognised that acquiring or constructing a residential property typically required debt financing, and the interest component of equated monthly instalments (EMIs) represented a genuine cost that reduced the net income attributable to house property ownership.

For a self-occupied property, the deduction under Section 24(b) was capped at Rs 2 lakh per annum. This limit applied to interest on loans taken on or after 1 April 1999 where the construction or acquisition was completed within five years from the end of the financial year in which the loan was taken. If construction was delayed beyond five years — which was common in under-construction projects — the deduction was restricted to Rs 30,000 per annum instead of Rs 2 lakh. This distinction penalised buyers of delayed projects significantly and was a source of considerable frustration for apartment purchasers who faced builder delays.

For let-out properties, the interest deduction under Section 24(b) had no monetary ceiling. The full interest paid on the home loan was deductible from the gross annual value of the property, potentially resulting in a loss from house property. However, Section 71(3A), inserted by the Finance Act 2017, capped the set-off of loss from house property against other income heads — primarily salary and business income — at Rs 2 lakh per year. Any unabsorbed loss beyond Rs 2 lakh was carried forward for up to eight assessment years and could only be set off against future income from house property, not against other income.

Pre-construction interest — interest paid during the period before the construction was completed or before possession was taken — was not deductible in the year of payment. Instead, it was aggregated and allowed as a deduction in five equal annual instalments starting from the year in which construction was completed or possession was taken. This deferred deduction treatment was important for under-construction property buyers who were servicing EMIs on a property not yet available for use.

The concept of Gross Annual Value (GAV), Net Annual Value (NAV), and the 30% standard deduction under Section 24(a) formed the broader framework within which the Section 24(b) interest deduction operated. NAV was arrived at by subtracting municipal taxes paid from GAV. From NAV, a flat 30% standard deduction was allowed regardless of actual expenses, and then Section 24(b) interest was deducted to arrive at the final income or loss from house property.

Under the new tax regime (Section 115BAC), Section 24(b) was not available for self-occupied properties but remained available for let-out properties. This asymmetry meant that taxpayers with a single self-occupied home loan lost the Rs 2 lakh deduction if they shifted to the new regime, while those with rental properties continued to receive the interest deduction. This differential treatment was a significant factor in the regime choice calculus, particularly for taxpayers in the Rs 10-15 lakh income range where the old regime deductions could still generate a lower tax liability.