Took home loan, have rental income or own multiple houses in your names? Then, provisions of income from house property head of Income Tax becomes applicable on you. Confused? Check our complete guide on “Income on House Property” to avail maximum tax deductions and save tax.

What is the meaning of “Income from House Property”?

The Income Tax Act has divided the income received by an individual in various heads for simplification of tax computation. One of these heads is “Income from House property”. The income earned by the ownership of a property is said to be Income from House property. If a taxpayer owns a house property and rents it, the rent received from that property is taxable.

Your house, building, office, or shop can be termed as house property. All the properties are taxable be it commercial or residential.If the property is used for residential purpose it is taxed under income from house property. On the other hand if the property is used for business or profession then it is considered as income from business or profession.


What are the conditions for taxability of “Income from House Property”?

The income from house property is added to your gross total income only when it fulfills three basic conditions -

  • 1. You are the owner of that property.
  • 2. Property consist of any buildings and/or land.Building can be residential house, factory building, shops, offices etc.
  • 3. The property is used for any purpose except used by you(owner)for the purpose of running your business or profession.

Important Note: The rent from the vacant land is considered as income from other sources.


How to calculate Income from House Property for income tax purposes?

The income tax categorises your income under 2 categories for the purpose of taxability of house property income. These are :

Self-Occupied House Property This is the type of property that is self owned and used for own residential purposes. This may be occupied by the owner’s family or relative or self. A property that is unoccupied is considered as a self-occupied property for the purpose of income tax. Before the Financial Year 2019-20 if taxpayer owns more than one house property, only one is considered as self-occupied property and rest are assumed to be let out. From 2019-20 onwards two properties are considered as self-occupied properties.
Let Out House Property Any house property that is rented for complete or part of the year is considered as a let out property for income tax purposes.
Note  :Inherited Property Any property inherited from parents, grandparents, etc, can be either considered as self-occupied or let out house property based on the usage as discussed above.

Let’s understand the steps for the calculation of Income from House Property.


Steps to compute “Income from House Property”

The calculation of income from house property involves various steps. These steps are common to both the categories of house property Self-Occupied and Let Out. These are:

Calculation of Income from House property

Calculation of Income from House property
a. Determining Gross Annual Value (GAV) of the property :

The gross annual value of a self-occupied property is nil, while for a let out property the gross annual value is the rent collected for the same house property.

b. Reduction of Municipal Taxes(property tax):

When the property tax is paid it is allowed to be deducted from the gross annual value of the property.

c. Determination of Net Annual Value (NAV):

When the property tax is deducted from the Gross Annual Value it gives the Net Annual Value.

d. Reduction of standard Deduction @30% of Net Annual Value:

30% of the Net annual Value is allowed to be deducted as a rebate from the NAV under Income Tax Act. Beyond 30% no other expenses such as repair, reconstruction or painting can be claimed as a tax relief under the Act.

e. Reduction of home loan interest:

The interest paid during the financial year on the house loan availed is to be deducted under section 24 of the Income Tax Act.

f. Final Determination of Income from House property:

The final value that arrives is your income from house property. This is taxable at the slab rate applicable on your income.

g. Loss from house property:

If an individual owns a self-occupied property purchased on loan, claiming a deduction on home loan interest will result in loss as the Gross Annual Value of the house property will be nil. This loss can be adjusted in income from other heads.

Important note- The gross annual value of the let out property is the rental value of the property. In such case, the rental value should be higher than or equal to the realistic rent of the property that is determined by the municipality.


Calculation/Assessment of “Income from House Property” in both cases – Self-occupied and Let Out

Type of House Property Self-Occupied Property Let Out Property
Gross Annual Value
Less: Municipal Taxes/ Taxes paid to local authorities
Net Annual Value
Less: Deductions under section 24
  • Standard Deduction
  • Interest paid on Home Loan
Income from House property
Nil
Not Applicable
Nil
Not applicable
Limit to Rs 2 Lakh per annum
XXX
XXX
XXX
XXX
30% of NAV
No limit
XXX
Important Note: From the F.Y. 2017-18,set of loss of income from house property from other sources of income is restricted to Rs. 2,00,000.

How to calculate the Gross Annual Value of House Property?

Assessment of Gross Annual Value of Self-Occupied House Property :

The annual value will be nil if the individual self occupies the only property he or she owns. However, if the person has multiple properties with the purpose of self occupation, only one property is considered as self occupied and its annual value can be specified as nil . The assessment of the annual value of the remaining properties will be done according to the expected rent if the property was let out.

Assessment of Gross Annual Value of Let-Out House Property :

Step 1: Find out the Reasonable Expected Rent of the Property (A)

Reasonable Expected Rent is the amount for which the property can be reasonably be expected to be let out from year to year. It is higher of the Municipal Valuation or Fair Rent of the property, but cannot exceed the standard rent determined as per the Rent Control Act. Reasonable Expected Rent = Higher of Municipal Valuation or Fair Rent, subject to maximum Standard Rent

Step 2: Find out the Actual Rent Received or Receivable (B)
Step 3: Higher of (A) or (B), is the Gross Annual Value

Municipal value is the value of the house property that is calculated by the municipal authorities for imposing municipal taxes.

Fair rent value is the fair rent that can be charged for a similar property with the same features in the same locality.

Standard rent is the rent determined under Rent Control Act. The property owner cannot charge a rent higher than the standard rent fixed under Rent Control Act.

Net Annual Value (NAV) is the value calculated as Gross Annual Value minus Municipal taxes paid.

Deductions are the rebates that are given to the taxpayer as benefits for making investments. These are deducted to ascertain the Actual taxable income. The taxpayer can claim these deductions under section 24 of the Income Tax Act, 1961.

What are the Deductions for calculation of Income from House Property?

The deductions under the head Income from house property are provided under section 24 of the Income Tax Act.These are:

Standard Deduction:

You can claim 30% of the Net Annual Value as a deduction of repairs, rents and so on (irrespective of the Actual expenditure incurred). If the Gross Annual Value is nil this deduction is not applicable.

Home Loan Interest:

You can claim deductions for interest on home loans taken for the purchase, construction, reconstruction and repair under this section.


How to Calculate of Income for Self Occupied house property?

Prior to Budget 2019, when an assessee own more than one residential houses, only is considered as self -occupied and other was considered as deemed let-out. After Budget 2019, an assessee can own two houses as self-occupied houses and more than two houses will be considered as deemed let out. Before proceeding further, there are certain scenarios of self-occupied to be discussed:

  • Property used for business and profession: If the property is used for business and not for residential purpose, then no income will be considered under the head “income from house property” and rent expenses in regards to house property will not be allowed under the head “Income from business and profession.”
  • Provided to employees as residential quarters: Where the house property is provided to the employees as quarters , then the property is considered as a part of business but where any rent is charged from the employees for the same, rent received will be taxable under business and profession.

Example for Calculation of Income from Self-Occupied House Property

To understand how income is computed for self occupied properties , let's take an example:

Mohan owns a house property , municipal value of which is INR 2,50,000 and municipal tax paid by him is INR 53,000. Interest on home loan paid by Mohan is INR 2,88,000. Compute income of Mohan.

Solution:
Particulars Amount(Rs.)
A.Gross Annual Value (for self occupied properties, GAV is considered NIL) NIL
B.Less: Municipal Taxes (For self occupied, municipal taxes are considered) NIL
Net Annual Value (A-B) NIL
Less : Interest on home loan As per section 24, interest is restricted to INR 2 lakh) (2,00,000)
Income from House Property (2,00,000)

How to Calculate of Income from Let-Out House Property ?

Where assessee owns more than one house(for F.Y. 2018-19) and two houses (for F.Y. 2019-20), the remaining are considered as deemed let out properties. Let's discuss a case study on how to calculate income from deemed let out properties.

Example for Calculation of Income from Let-Out House Property

Sita owns a house property which is let out throughout the year. Municipal Value is INR 1,45,000, Fair rent INR 1,36,000, standard rent INR 1,24,000 and actual rent received INR 1,15,000.Municipal taxes paid by the tenant INR 5,400. Interest on home loan paid INR 3,50,000. SIta also has income from Business of INR 7,12,000.

Compute net income of sita from house property.

Solution:
Particulars Amount(Rs.)
A.Gross Annual Value Reasonable Rent: (A) 1,24,000  Higher of MV and FR 1,45,000 Maximum to Standard rent i.e. 1,24,000
Actual rent received:  (B) 1,15,000
GAV is higher of A and B
1,24,000
B.Less: Municipal Taxes (In case of deemed let out, municipal taxes can only be claimed if paid by the owner and here, tenant has paid) NIL
Net Annual Value (A-B) 1,24,000
Less : Interest on home loan
(3,50,000)
Income from House property (2,26,000)
Less: Set off from Business income (restricted upto  INR 2,00,000) 2,00,000
Net Income From  House property (26,000)

What are the Tax Benefits on Home Loan?

a. Tax Deduction on Home Loan Interest: Section 24: Under section 24 of the Income Tax Act, 1961,any interest paid on home loan can be claimed as a deduction but restricted upto Rs. 2 lakhs for self occupied properties .The interest is sub categorised to pre construction period and post construction period.

b. Tax Deduction on Principal Repayment : Sec 80C provide deduction on principal repayment of the home loan upto INR 1,50,000 in one F.Y.

C Additional tax deduction under Section 80EEA: In the Budget 2019, new section 80EEA has been inserted to provide additional tax benefits to the home buyers having house 5 property upto Rs 45 lakhs on the interest paid on home loan upto INR 1.5 lakhs. This deduction is over and above deduction under section 24.

To gain detailed tax benefits on home loan buyers visit our guide

What are the income tax deductions on home loans for Joint Owners?

A.Neither Co-owners nor co-borrowers

  • The taxpayer can claim deduction up to Rs 2 Lakh on home loan interest, in two cases:
    1. The owner self occupies the house property or
    2. If the house property is vacant.
    3. If the property is rented out, the entire home loan interest is allowed as a deduction from the tax.
  • Taxes can be saved upto Rs. 1,50,000 within the overall limit under Section 80C while repayment on principal amount of loan.
Few conditions on which this deduction can be claimed are:
  • (i) The loan must be availed for the construction of purchase of the new house property.
  • (ii) Till five years from the time of possession, the property should not be sold off.
  • (iii) Stamp duty, registration charges and other related expenses are directly allowed as deductions under Section 80C, with the limited amount of Rs. 1.5 Lakh. This can be claimed in the same year you make the payments.

B. Co-owners and co-borrowers

  • In the case of co-owners of house property who are also co-borrowers of a home loan that is self-occupied, each can claim a deduction on interest on the loan limited to Rs. 2 Lakh(provided interest on loan is more than equal to Rs.400000)
  • Each of them can claim the deduction on principal repayments, stamp duty as well as registration charges under Section 80C with the overall limit of Rs.1.5 Lakh. The ratio of the deduction of each benefit will be in the same as the share of ownership in the property.

C. Co-borrowers not co-owners

  • If one individual is just a co-borrower of a loan and is not the owner of the property, he or she is not entitled to claim interest on home loan paid.
  • If one is not a co-owner of house property, then he is not entitled to any benefits on principal repayment, stamp duty etc.

D. Co-owners not co-borrowers

  • 1.If one individual is just a co-owner of a loan and is not the co-borrower of the property, he or she is not entitled to claim interest on home loan paid.
  • 2.Each of them can claim the deduction on stamp duty as well as registration charges under Section 80C with the overall limit of Rs.1.5 Lakh. The ratio of the deduction of each benefit will be in the same as the share of ownership in the property.

E. Tax deductions for Homeowners who owns property for the first time

An additional tax benefit of up to Rs.50,000 can be claimed by homeowners on interest on home loan under section 80EE
Note - This benefit is not availed for an under construction property.


How to Save Tax on Income from House property?

Paying taxes on property is a big pain. On should plan carefully to avoid huge amounts of taxation. There are numerous ways to save taxes on Income from House Property. They are:

Become co-owners

If the taxpayer has jointly taken home loan with his or her spouse or someone else, both can claim tax exemption on payment of interest and principal.

Planning a second home

If one property is already registered on the name of the taxpayer, it is always a better idea to register other property on the name of the individual’s spouse or any relative. This way one can avoid excess taxation on the properties.

Joint ownership

If the property is owned by numerous individuals, the tax on Income from House Property can be divided among co-owners to lessen the burden on a single person.

Vacant houses

The house properties that one owns and are vacant will still be taxed on the fair rental value. So it is always a good idea to let out any or all empty properties, which will bring income and there will be no loss because of the taxation.

Ownership of multiple properties

If a taxpayer owns multiple properties, only one can be assumed as a self-occupied property. So it is always important to evaluate the tax liability of all the properties and choose the highest tax liability property as your home and let out the remaining. One can change self-occupied property every year if needed.


Conclusion

In a nutshell, it is always a better option to get complete knowledge of the taxes and proper assessment of incomes. With this article you can get a proactive approach to plan strategically where and how to invest in properties to gain maximum returns and charged minimum taxes. While owning properties the individual must keep in mind the number of properties bought, the ways in which the home loans be taken. On should also consider joint ownership to divide get deductions in the best way. This editorial will serve you as a complete direction to swing your house property investment in the best possible manner with various ways to cut down the taxes you have to pay.


Frequently Asked Questions

Q - Is the income from rent of a property taxable?

Yes, the property is taxable on the basis of its annual value for rent received by the owner.


Q - Can the income under the head Income from House Property be negative?

Only in case the house property is self-occupied the Gross Annual Value and Net Annual Value are nil. If in this case you have interest, then this is a loss as it is a negative income.


Q - Are all rent received be shown on ITR and taxable?

All the rental income must be reported at the time of filing the tax returns as they are taxable. The general expenses that are associated with the rent can be deducted from your rental income.

Q - Can I claim HRA and Home loan both?

There are two conditions:

a. If the taxpayer has a house but is living in a rented accommodation because of some issues he or she can claim HRA (House Rent allowance) for the rent they are paying for the house where they stay as well as deductions on interest up to Rs. 2 Lakh on the home loan.

b. If the taxpayer has a let out property and stays in a rented house he or she can claim HRA (House Rent allowance) for the rent he or she pays and also the entire interest she pays during the entire year on the home loan.


Q - Can I get tax benefit on home loan for under construction property?

Yes , interest paid on home loan during construction property can be claimed as a deduction under section 24 only after completion of the construction. The deduction can be in five equal installments.


Q - What is the limit on interest on housing loan?

Under Section 24, limit for interest deduction for a self occupied property is INR 2 lakh whereas for let out property, there is no limit defined under this section. However, if loan is taken for repair or renovation of the self occupied property, limit is INR 30,000.


CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. 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.