Whether looking to buy house or already own a house, this guide shall give you an insight of tax benefits attached with loan repayment and provide different avenues to reduce tax liability on income from house property.
Taking loan for house property although increases the burden of interest and principal on pocket but saves certain taxes. Both interest payment and principal repayment can be claimed as deduction under different provisions which are outlined as follows:
Expert Advice: If you avail the deduction under Section 80C, don’t sell the house property for 5 years from the end of year in which possession has been obtained or the property has been obtained. If you do so, the deduction gets reverse and you have to pay tax on the amount of deduction.”
You can claim the amount of interest payable as deduction under Section 24 of the Income Tax Act. Interest can be classified into pre-construction interest (interest from date of loan taken up to date of completion of construction) and post construction interest (interest after completion of construction).Tax benefit in case of pre-construction interest payment:
Expert Advice: The limit of 200,000 specified in case of loan taken for self-occupied property is specified for total interest amount payable which is calculated by adding the following 3 amounts: 1. Interest of Pre-Construction Period 2. Interest of loan taken for repair/ renewal 3. Interest taken for acquisition/ construction
|Particulars||Let-Out or Deemed Let-Out||Self-Occupied|
|Gross Annual Value(GAV)||***||NIL|
|Less: Municipal Tax Paid||***||NIL|
|Net Annual Value (NAV)||***||NIL|
|Less: Deductions under Section 24: (1) Standard Deduction of 30% of NAV (2) Interest Deduction||*** ***||NIL ***|
|Income From House Property||***||***|
Gross Annual Value: Before calculating, let’s understand few terms:
Municipal Taxes: Deduction to be allowed only if actually paid by the owner of the house. Even if the tenant pays the tax but recovers it from owner, the deduction shall be allowed to owner.
Standard Deduction: Expenses related to electricity, repairs, water, insurance etc. are deductible from income by virtue of standard deduction. Quantum of actual expenses doesn’t matter; standard deduction @ 30% shall always be granted.Standard Deduction = 30% of Net Annual Value
You can calculate the tax liability in case of partly self-occupied and partly let-out house in the manner below:
|Municipal Value||Rs. 5,00,000|
|Fair Rent||Rs. 4,20,000|
|Standard Rent||Rs. 4,80,000|
|Actual Rent (per month)||Rs. 50,000|
|Let Out (in months)||9 Months|
|Self Occupied (in months)||3 Months|
If you did not receive rent from tenant during the year and it has become irrecoverable, then you need not pay tax on such rent. It shall be deducted from Gross Annual Value. Upon fulfillment of following conditions, unrecovered rent is declared as unrealized rent:
Expert Advice: “If you receive any unrealized rent subsequently, then such rent shall be taxable in year of receipt even if you are no longer the owner of the house property for which it is received.”
Any arrear rent received shall be chargeable to tax in year of receipt. Standard deduction of 30% shall be eligible to be reduced from such rent.
A house property owned by two or more persons is covered under this head. Income/ loss arising from house property & deductions thereon are allocated in ratio of ownership. In case of house property self-occupied by each co-owner – each of the co-owner shall be entitled to maximum deduction of 30,000/2,00,000 individually on account of interest payable. In case of house property rented – income shall be computed as if house is owned only by single owner and then the income shall be allocated in ratio of ownership. Further limit of 150000 under section 80C is available separately for each of the Joint owner.
Expert Advice: “For claiming the deduction of interest, the co-owners need to be co-borrowers as well. So if you co-own a house but not a co-borrower then you are not entitled to claim any deduction.
Example: Anjali along with her father Anoop (both being the co-owners) purchased a flat in Mumbai for Rs. 90 lacs, for which Anjali took a loan of Rs. 40 lacs and rest of the amount was contributed from family’s saving. In this case, Anjali and Anoop are the co-owners but loan was taken by Anjali only. Thus, interest deduction on loan will be available to Anjali only.
Deemed ownership is a situation where you are not the legal owner of a house property, but due to circumstances , you are deemed as the owner of the house and liable for paying tax on any income arising from that particular house property. The conditions where a person is deemed to be the owner of a house property can be outlined as below –
If you receive a property in will/inheritance, no tax can be imposed at the time of inheritance since there is not gift tax. But in case you sell the property, then it shall attract the provisions of Capital Gains.
Yes, only when municipal taxes paid during the year exceed the Gross Annual Value.
|Less: Municipal taxes||40,000|
|Less: Standard deduction @ 30%||9,000|
|Less: Interest Amount||60,000|
|Income from HP||-39,000|
So now loss from house property will vary according to amount of interest. If interest on home loan is 60,000; loss shall be 21,000 – 60,000 = 39,000. If interest is 1,00,000; loss shall be 21,000 – 1,00,000 = 79,000. Loss arising from house property can be set-off against other heads of income.
Giving rent on the house taken at place of job and paying interest and principal on home loan taken for owned house in home city can give dual benefits. Claim HRA for the rent paid under “Income from Salaries” and avail deduction for interest paid on home loan under “Income from House Property”.
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