The Income Tax Act has divided the income received by an individual into five different heads. One of them is ‘Income from House Property’, which is the income earned by the assesse from a house property.
If an individual owns a house property, the rent received or the deemed rent become taxable. This actual rent received or the notional rent is referred to as ‘annual value’.
The income from house property is chargeable to tax only if it satisfies three essential conditions:
- The assessee is the owner of that property.
- The property must consist of house, buildings and/or land any land attached to it.
- The property may be used for any purpose except used by the owner for the purpose of running his business or profession.
Here ownership includes freehold, leasehold rights and also includes deemed ownership.
Section 27 of the Income Tax Act defines deemed ownership of the house property for the purpose of levying tax as:
- Transfer of ownership to a spouse or minor child
- Holder of impartible estate. Impartible estate refers to the property which is not legally divisible such as dividing a single storey house with say 3 rooms among 7 heirs.
- Property held by member of a co-operative society
- Any person who has acquired a property under Power of Attorney transaction.
However, if the taxpayer uses this property for operating or running a business or profession, it will not be taxed as income from home property.
When a property is considered as self-occupied?
A property is treated as self-occupied house property if it is not let-out even for a single day during the year and meets any one of the following two conditions:
- If it is occupied by the owner for his own residence; or
- If it can’t be occupied by him owing to employment or business at any other place, and he resides at that other place in a rented house/house not belonging to him.
When a property is considered deemed let-out?
If a person owns more than one house property and none of them have been let-out during the year (even for a single day), then he can treat only one house property as self-occupied, and all other house properties are deemed to be let-out (however, from financial year 2019-20 two houses can be treated as self-occupied). As a result, higher of municipal valuation of such property or market rent of a similar property in similar location may be deemed as the annual value of such property and a person has to pay tax on it even if he does not earn any income from such property
Rental income is the Net Annual value of House Property.
Calculation of Income from House Property:
Computation of Income Under House Property: Let out Property:
Gross Annual Value
Less: Municipal Taxes
Net Annual Value
Less: Deduction under Section 24
Standard Deduction @ 30%
Interest paid on Borrowed Loan [No limit]
Income from House Property
Computation of Income Under House Property: Self Occupied:
Gross Annual Value
Less: Municipal Taxes or Taxes paid to local authorities
Net Annual Value
Less: Standard Deduction
Less: Interest on Housing Loan
Restricted to Rs. 2 lakhs
Income from House Property
What is Gross Annual Value?
Annual value: It is the capacity of the property to earn income.
Municipal value: It is the value of the property as derived by municipal authorities.
Fair Rental Value: It is an assumed rental value of the property which is calculated by comparing it with a similar property having similar features.
Standard rent: It is a fair amount of rent prescribed by Rent control Act which ensures that tenants are not exploited while owners receive a fair amount of rent.
Actual rent received/receivable: It is the actual amount of rent received by the owners from the tenants.
Gross Annual Value (GAV):
The one which has highest value among the below three terms is considered Gross Annual Value:
a) Rent received or receivable
b) Fair Market Value
c) Municipal Valuation
If the Rent Control Act is applicable, then the one which has highest value among the below two items is considered Gross Annual Value:
a) Standard Rent
b) Rent Received.
Net Annual Value is Gross Annual Value minus Municipal taxes like property tax, sewerage tax etc.
Note: For calculation of Net Annual Value, the Municipal Taxes for Income from House Property will be considered as Zero if it is not paid by the owner of the property. For e.g. If municipal taxes is paid by the tenant then it will be clubbed under Actual Rent Received therefore will be Zero and Net Annual Value will be same as Gross Annual Value.
Deductions: The actual taxable income from house property is ascertained after deducting the following deductions under Section 24 of the Income Tax Act, 1961.
Two types of deductions are available u/s 24
1) Standard deduction of 30% of annual value
2) Interest paid on home loan
A tax deduction of 30% of net annual value of the property is allowed to the taxpayer. Net annual value is calculated as gross annual value minus municipal taxes Paid. This deduction is allowed irrespective of the amount spent on insurance, repairs, water and electricity supply, etc.
Note: Since Annual value of a self-occupied property is zero or nil, the standard deduction allowed is also zero or nil.
Interest paid on home loan:
Tax Benefit on payment of interest on housing loan is allowed as a deduction under section 24 of the Income Tax Act.
In case the taxpayer has borrowed capital for the purpose of acquiring, constructing, repairing, renewing or reconstructing any property, the amount of interest payable on such loan is allowed as a deduction.
The amount of interest payable every year should be calculated and claimed as a deduction. It is irrelevant whether this interest has actually been paid or not during the year.
In case the loan is being taken for a Residential property, deduction under Section 80C is also allowed for repayment of Principal.
In case loan is being taken for an under construction property (whether Residential or any other property), the interest on loan payable for the period while the property was under construction will not be allowed to be claimed during the period of construction.
Such Interest will be aggregated and allowed as a deduction in 5 successive instalments starting from the year in which the construction has been completed.
The interest will be aggregated starting from the year in which the loan was taken till the year prior to the year in which the construction has been completed and not till the actual date of completion.
The maximum tax deduction that you can get here on interest payment of home loan taken for a self-occupied property is Rs. 2 lakhs. In case the property for which the home loan has been taken is not self-occupied ie. rented or deemed to be rented, no maximum limit for tax deduction has been prescribed and the taxpayer can take deduction of the whole interest amount u/s 24.
However, if the owner has not occupied the property himself due to his employment, business or profession carried on at any other place, which has forced him to reside at any other place, then the amount of tax deduction available u/s 24 is limited to Rs 2 lakhs only.
It is also important to note that this tax deduction of interest on home loan u/s 24 is deductible on payable basis, i.e. on accrual basis. Hence, deduction u/s 24 should be claimed on yearly basis even if no payment has been made during the year as compared to section 80C (deduction on principal repayment) where deduction is allowed only on payment basis.
The tax benefit under section 24 is reduced from Rs 2 lakhs to Rs 30,000, if the property is not acquired or construction is not completed within 3 years from the end of Financial Year in which the loan was taken. However, the limit of 3 years has been increased to 5 years from Financial Year 2016-17 and onwards.
Deduction on pre-construction interest is allowed when you have taken a loan for purchase or construction of a house property. However, if the loan is taken for repairs or reconstruction then deduction is not allowed. The deduction for this interest is allowed in 5 equal instalments starting from the year in which the house is purchased or the construction is completed.
Though pre-construction interest is allowed to be claimed as tax deducted in 5 equal yearly instalments, which can be claimed beginning the year in which the construction of property is completed, the total amount that can be claimed in a year is subject to a threshold of Rs 2,00,000 in case of a self-occupied house property.
Any amount paid for brokerage or commission for arrangement of the loan will not be allowed as deduction [Circular No. 28 dated 20-08-1969]
Where a fresh loan has been taken to repay the original loan, if the second borrowing has really been used merely to repay the original loan and this fact is proved to the satisfaction of the Income Tax Officer, the interest paid on the second loan would also be allowed as a deduction. [Circular No. 28 dated 20-08-1969]
Interest on Interest is not deductible. The taxpayer is entitled to deduct only the interest payable by him on the capital borrowed.
In the case of let out property, the occupier or the tenant has paid the municipal taxes etc., no deduction of municipal tax etc will be allowed from gross annual value as these taxes have not been paid and borne by the owner.
How do I Save Tax on Income from House Property?
Careful planning can enable you to save a sizeable amount from taxation. Some of the things you can do to save tax are as follows:
Joint Home Loan If you jointly own a property with someone and also apply for a joint home loan with your partner, you will both be eligible for tax deductions on interest up to Rs. 2,00,000 each.
Planning a second home? If you already have one self-occupied property registered to your name and wish to avoid paying taxes on a second home, register the second property on your spouse/relatives name to avoid excess taxation.
Joint ownership Taxation on income from house property can be divided between co-owners, and hence lessen the tax burden.
Ownership of more than one property
If you own multiple properties, only one of these can be treated as your residence and fall under self-occupied property (SOP).
It is important to evaluate the tax liability on all your properties and choose the one with the highest tax liability as SOP, and let out the remaining. You can also change the SOP every year.
Vacant houses that you own will still be taxed based on the fair rental value, so its advisable to let any and all vacant properties out, enabling income and no loss because of taxation.
Tax Benefit on Home Loan Principal Repayment u/s 80C
The amount paid as repayment of principal amount of home loan taken for the construction or purchase of a new house property by an individual/HUF is allowed as tax deduction u/s 80C of the Income Tax Act. The maximum tax deduction allowed u/s 80C is Rs 1,50,000. The tax deduction on principal repayment is also a part of the various deductions allowed u/s 80C, which includes amount invested in PPF Account, Tax Saving Fixed Deposits, Equity Oriented Mutual funds, National Savings Certificate, Senior Citizens Saving Scheme, etc. The deduction limit of section 80C is inclusive of all these options. This tax deduction is available on payment basis and does not depend on the year for which the payment has been made by the assessee.
Deduction on Stamp Duty & Registration Fee
The amount paid as stamp duty & registration fee is also allowed as a tax deduction u/s 80C. This deduction can be claimed whether the assessee has taken a loan or not. You can claim the deduction in the year you incur these expenses.
Conditions for Claiming Deduction u/s 80C for principal repayment of home loan:
You can claim deduction only if the construction of property is complete and you have received a completion certificate for the same. No deduction would be allowed under this section for repayment of principal for those years during which the property was under construction. Deduction is also available whether the property is self-occupied or let out. The benefit can also be claimed for more than 1 house property.
Reversal of Tax Benefits
If you have claimed the deduction u/s 80C, then you should avoid selling the house property in less than five years from the end of financial year in which you received its possession. If you sell the property within this time limit then you will not be eligible to claim any deduction for the principal repaid during the current F.Y. and the total amount of tax deduction already claimed in respect of earlier years shall be deemed to be your income of such year in which you sold the property and you will be liable to pay tax on that income.