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Owning a house is a dream of many, and we all save to fulfill this dream. However, owning a house property comes with tax compliance. And who would like to pay their hard-earned money on taxes. If you want to know how to save tax on home loan interest, this article is for you.
Budget 2024 Update
It is proposed that income from letting out of a house or part of the house by the owner, shall not be charged under the head ‘profits and gains of business or profession’ and will be chargeable to tax under the head ‘income from house property’ only. Furthermore, the proposal suggests that when calculating capital gains from the sale of a residential property, the seller should not include any home loan interest that they have already claimed as a deduction under income tax during the time they owned the property. This means the seller can't add the interest they've deducted to the property's cost of acquisition, which could result in higher capital gains tax.
"Income from House Property" is defined as income earned from owning and renting property, including residential and commercial buildings and their attached land. Residential property income is taxed under this category, while property used for business is taxed as business income.
The Income Tax Act divides house properties into different types for tax purposes. Given below are the major categories of house properties -
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 income from other sources.
The calculation of income from house property involves various steps. These steps are common to both the categories of house property, i.e., Self-Occupied and Let Out. These are:
The gross annual value of a self-occupied property is nil. In contrast, the gross annual value for a let-out property 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.
The property tax paid by the property owner in the previous year has to be deducted from the NAV.
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 the Income Tax Act. Beyond 30%, no other expenses such as repair, reconstruction, or painting can be claimed as 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 the house property. This is taxable at the slab rate applicable to 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 cases, the rental value should be higher than or equal to the realistic rent of the property determined by the municipality.
Here is calculation how to calculate income from house property:
Income from house property contains the income generated by the owned property of an individual.
Let's assume you have property and you are charging Rs. 2,00,000 per year as rent. Let's also assume that you have paid Rs. 10,000 in municipal taxes for that year and have Rs. 1,00,000 as interest on borrowed capital.
| Total annual rental income | Rs. 2 lakh |
| Less: Municipal taxes paid | (Rs. 10,000) |
| Net rental income | Rs. 1.9 lakh |
| Less: 30% of net rental income | (Rs. 57,000) |
| Interest on borrowed capital | (Rs. 1 lakh) |
| Income from house property | Rs. 33,000 |
From the total annual rental income, you have to reduce the taxes paid to the local municipal authorities during the year to arrive at the net rental income. (Note: In case some rent cannot be realized, then such amount can be reduced from the total rent.)
Of this net rental income, 30% is allowed as a standard deduction. Further, you can also deduct the interest paid on the loan taken to acquire the said property to arrive at the income from the house property that would be liable for taxation. You can use Tax2win’s Income from House Property Calculator to easily calculate Income from your house property.
Prior to Budget 2019, when an assessee owned more than one residential house, only one property was considered self-occupied, and the 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, the municipal value of which is INR 2,50,000 and the municipal tax paid by him is INR 53,000. Interest on the home loan paid by Mohan is INR 2,88,000. Compute the 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 the assessee owns more than one house(for F.Y.2022-23) and two houses are considered self-occupied (for F.Y.2022-23), the remaining are deemed let-out properties. Let's discuss a case study on calculating income from deemed let-out properties.
Sita owns a house property that 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 is 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 the 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 than 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, the 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) |
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.
a. Tax Deduction on Home Loan Interest: Section 24: Under section 24 of the Income Tax Act, 1961, any interest paid on a home loan can be claimed as a deduction but restricted to up to Rs. 2 lakhs for self-occupied properties. The interest is sub-categorized into the pre-construction period and post-construction period.
b. Tax Deduction on Principal Repayment: Sec 80C provides a 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 home buyers having house property upto Rs 45 lakhs on the interest paid on home loans upto INR 1.5 lakhs. This deduction is over and above the deduction under section 24.
To gain detailed tax benefits on home loan buyers, visit our guideThe taxpayer can claim a deduction of up to Rs 2 Lakh on home loan interest in two cases:
Taxes can be saved up to Rs. 1,50,000 within the overall limit under Section 80C during repayment on the principal amount of the loan.
An additional tax benefit of up to Rs.50,000 can be claimed by homeowners on interest on a home loan under section 80EE
Note - This benefit is not availed for an under-construction property.
Paying taxes on property is a big pain. One 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 a 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 in the taxpayer's name, it is always a better idea to register another property in the name of the individual’s spouse or any relative. This way, one can avoid excess taxation on the properties.
If numerous individuals own the property, 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, then two house properties can be claimed as self-occupied, and the rest shall be treated as deemed let out or let out, as the case may be. So it is always important to evaluate the tax liability of all the properties, choose the highest tax liability property as your home, and let out the remaining. One can change self-occupied property every year if needed.
There is no restriction on claiming both HRA and home loan deductions. The only thing to remember is that interest and principal repayment deductions are for the home you own, while the HRA deduction is for the rental expenses you pay.
It is the value of the house property that is calculated by the municipal authorities for imposing municipal taxes.
It is the fair rent that can be charged for a similar property with the same features in the same locality.
It is the rent determined under the Rent Control Act. The property owner cannot charge a rent higher than the standard rent fixed under the Rent Control Act.
It is the value calculated as Gross Annual Value minus Municipal taxes paid.
It is the actual amount or the actual rent received by the owner from the tenant as rent.
These are the rebates 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.
Owning a house is an important source of income. However, calculating the income manually can be intimidating and confusing. Apart from those mentioned above, there are various other ways to maximize tax savings on your income.
Taking professional help can help you plan your taxes carefully and ensure accurate ITR filing. Book your eCA today and avoid last-minute stress!
In India, rental income from a property is subject to taxation based on an individual's applicable tax slab rate. However, if the Gross Annual Value (GAV) falls below ₹ 2.5 lakh, no tax is levied on the rental income. Additionally, there are various deductions available under the Income Tax Act that can reduce one's rental tax liability.
Yes, the income from house property can be negative if the house property is self-occupied and 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 when 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 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 a home loan during under-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, the 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 the loan is taken for repair or renovation of the self-occupied property, the limit is INR 30,000.
The charging section for income from house property in India is Section 22 of the Income Tax Act, 1961. This section lays out the basic conditions under which income derived from a house property is considered taxable.
