Income from House Property & Taxes

What is “Income from House Property”?

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

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

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:

Calculations 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.

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. Final Determination of 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.

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

How to calculate the Gross Annual Value of a House Property?

Important terminologies related to “Income from House Property”

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.

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 as 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 as 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.

How to Calculate Income from Let-Out House Property?

Where the assessee owns more than one house(for F.Y.2022-23) and two houses are considered as self-occupied and (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.

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 the home buyers having house property upto Rs 45 lakhs on the interest paid on home loan upto INR 1.5 lakhs. This deduction is over and above the deduction under section 24.

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:
  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 up to Rs. 1,50,000 within the overall limit under Section 80C during repayment on the principal amount of the loan.

A 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 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 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 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.