Know the tax provisions for house property income and tax benefits
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.
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.
The income from house property is added to your gross total income only when it fulfills three basic conditions -
Important Note: The rent from the vacant land is considered as income from other sources.
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.
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:
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.
When the property tax is paid it is allowed to be deducted from the gross annual value of the property.
When the property tax is deducted from the Gross Annual Value it gives the 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.
The interest paid during the financial year on the house loan availed is to be deducted under section 24 of the Income Tax Act.
The final value that arrives is your income from house property. This is taxable at the slab rate applicable on your income.
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.
| 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
|
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. | ||
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.
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
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.
The deductions under the head Income from house property are provided under section 24 of the Income Tax Act.These are:
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.
You can claim deductions for interest on home loans taken for the purchase, construction, reconstruction and repair under this section.
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:
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) |
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.
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) |
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 guideAn 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.
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:
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.
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.
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.
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.
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.
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.
Yes, the property is taxable on the basis of its annual value for rent received by the owner.
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.
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.
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.
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.
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.
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