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Income From House Property & Taxes: How to Calculate Income From House Property

Updated on: 05 Apr, 2024 11:13 AM

In order to simplify the taxation process, the Income Tax Department has divided the income of an individual into various categories. One such category is “Income from House Property”. Income from property comprises all earnings derived by the taxpayer from a property. This includes various types of buildings such as residential homes, commercial offices, warehouses, factories, halls, shops, and auditoriums, along with any accompanying land like yards, garages, gardens, parking spaces, playgrounds, or recreational areas.

The income from house property includes rental income, sale proceeds from house property, etc. Owning a house can be a significant financial and emotional achievement, but it also comes with certain responsibilities. One of those responsibilities is paying property taxes annually. If you want to know how to save taxes on house property, this guide is for you.

The Income Tax Act has divided the income received by an individual into 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 (let it out) it, this income is termed as Income from House Property.The rent procured from that property is taxable. Property refers to any building (house, office building, warehouse, factory, hall, shop, auditorium, etc.) and/or any land attached to the building (compound, garage, garden, car parking space, playground, gymkhana, etc.).

If the property is used for residential purposes, it is taxed under income from house property. On the other hand, if the property is used for business or profession, it is considered income from business or profession.

After budget 2023 announcement, the government has changed how capital gains on the sale of a residential property are calculated. The cost of acquiring a house property doesn’t include any home loan interest claimed as an income-tax deduction by the seller throughout its holding term. If it is proposed not to include the interest claimed earlier as a deduction as the cost of acquisition for computing capital gains. This may have an impact on taxpayers who are planning to sell their residential property in the future.

Income from House Property

The Income Tax Act divides house properties into different types for tax purposes. Given below are the major categories of house properties -

  1. Self-Occupied Property: This refers to a house property that is used for one's own residential purposes. If an individual owns only one self-occupied property, it is treated as a self-occupied property for tax purposes. In such cases, the notional rental income is not taxable, and individuals can claim deductions on the home loan interest paid, subject to certain limits.
  2. Let-Out Property: A let-out property is one that is rented out or leased to another party. The rental income received from such a property is taxable under the head "Income from House Property." Individuals can claim deductions on the municipal taxes paid, standard deduction (30% of the net annual value), and interest on home loans.
  3. Deemed to be Let-Out Property: This category applies to properties that are not actually rented out but are deemed to be letout by the tax authorities. It typically includes properties that are not occupied by the owner due to employment, business, or other reasons. In this case, the notional rental income is considered taxable, and deductions for municipal taxes and interest on home loans can be claimed.
  4. Under Construction Property: Properties that are under construction or not ready for occupation are also considered for taxation purposes. In such cases, individuals cannot claim rental income as the property is not letout. However, once the construction is complete, the applicable treatment (self-occupied or let-out) will be determined based on the actual usage or rental arrangement.

What are the Conditions for the 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 consists of any buildings and/or land. The building can be a residential house, factory building, shop, office, etc.
  3. The property is used for any purpose except by you(owner) to run your business or profession.

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

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

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

Standard rent 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.

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

Actual Rent Received/Receivable It is the actual amount or the actual rent received by the owner from the tenant as rent.

Deductions 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.

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, i.e., Self-Occupied and Let Out. These are:

Calculations 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. In contrast, the gross annual value for a let-out property 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.
The property tax paid by the property owner in the previous year has to be deducted from the NAV.

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 the Income Tax Act. Beyond 30%, no other expenses such as repair, reconstruction, or painting can be claimed as 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. Income from House Property:

The final value that arrives is your income from the 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 cases, the rental value should be higher than or equal to the realistic rent of the property determined by the municipality.

How to Calculate Income From House Property for ITR Filing

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.

How to Calculate Income for Self Occupied 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:

  • Property used for business and profession: If the property is used for business and not for residential purposes, 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 a part of the 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, 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.

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 Income from LetOut House Property?

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.

Example for Calculation of Income from Let-Out House Property

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.

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
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)

What are the Deductions for the 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.

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 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 guide

What are the Income Tax Deductions on Home Loans for Joint Owners?

A. Neither Co-owners nor co-borrowers

The taxpayer can claim a deduction of up to Rs 2 Lakh on home loan interest in two cases:

  • The owner self-occupies the house property or
  • If the house property is vacant.
  • If the property is rented out, the entire home loan interest is allowed as a deduction from the tax.

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.

  • The loan must be availed for the construction or purchase of the new house property.
  • Till five years from the time of possession, the property should not be sold off.
  • Stamp duty, registration charges, and other related expenses are directly allowed as deductions under Section 80C, with a 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 a 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 proportion 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 property owner, he or she is not entitled to claim interest on the home loan paid.
  • If one is not a co-owner of the 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 the home loan paid.
  • 2. Each can claim the deduction on stamp duty and registration charges under Section 80C with an overall limit of Rs.1.5 Lakh. The ratio of the deduction of each benefit will be in the same proportion as the share of ownership in the property.

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

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.

How to Save Tax on Income from House 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:

Become co-owners

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.

Planning a second home

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.

Joint ownership

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.

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, 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.

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 a Tax Consultation call now and maximize your tax savings.

Frequently Asked Questions

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

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.

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

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.

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

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.

Q - Can I claim HRA and a Home loan both?

There are two conditions:

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.

Q - Can I get tax benefits on a home loan for an under-construction property?

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.

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

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.

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.