Income from House Property and Taxes

All the rental income earned from buildings can be broadly classified under the head Income from house property. Even renting of commercial property can be classified under house property income. Income under this head is the rent on a property or notional rent of the property. 

There are specific deductions available especially for income under this head namely 30% standard deduction, interest on housing loan, municipal taxes paid, and deductions that can be claimed against gross total income such as principal amount repaid on a property, additional deduction available for first home buyers and so on.

This article explains in detail, manner of calculation of income, claiming of deductions under this head and general deductions available. It also talks about how to report home ownership in your income tax return.

Basics of House Property Tax

• A house property could be your home, an office, a shop, a building or some land attached to the building like a parking lot. 
• The Income Tax Act taxes all properties - residential or commercial - under the head ‘Income from House Property’.
• An owner for the purpose of income tax is its legal owner, someone who can exercise the rights of the owner in his own right and not on someone else’s behalf. 
• Income tax classifies the properties in two ways:

a. Self-Occupied House Property

• A self-occupied house property is used for one’s own residential purposes. 
• Up to two vacant house properties can be considered self-occupied for Income Tax purposes. 
• The annual value of such properties shall be nil if the owner occupies them for personal residence or cannot occupy them for any reason.
• The remaining house as let out for Income tax purposes. 

b.  Let Out House Property

• A house property that is rented for the whole or part of the year is considered a let-out house property for income tax purposes. 
• Any house property in excess of 2 self-occupied properties, as mentioned above, is also deemed a let-out property (treated as a let-out even if vacant).

Taxability of Land Appurtenant to Property

• Land which is an inseparable part of building, which is enjoyed by people who use the building is called as Land Appurtenant to Building. Eg. garden, driveway, parking etc.,
• Income from such land is always taxed  under the head ‘Income from House Property’.
• Income from letting out of vacant land is taxable under the head “Income from Other Sources” or “Profits or gains from business or profession” as the case may be.

Taxability when Property is used as Place of Business

If the owner of the property occupies it for carrying out his own business or profession, the annual value is not chargeable to tax.

Example of Calculation of Income for House Property

Let's consider a property with the following details:

• Gross annual value: Rs. 5 lakhs
• Municipal taxes paid during the year: Rs. 20,000
• Interest on loan borrowed for the year: Rs. 1 lakhs

Tax Deduction on Home Loans

a. Tax Deduction on Home Loan Interest: Section 24

• Homeowners can claim a deduction under section 24 up to Rs 2 lakh on their home loan interest if the owner or his family resides in the house property. 
• The same treatment applies when the house is vacant. 
• If you have rented out the property, the entire home loan interest is allowed as a deduction.

However, your deduction on interest is limited to Rs. 30,000 instead of Rs 2 lakhs if any of the following conditions are satisfied:

A. Condition I 

• The loan is taken on or after 1 April 1999, and 
• The purchase or construction is not completed within 5 years from the end of the FY in which loan was availed.

So, if the loan was taken on 30th April 2024, the construction of the property should be completed by 31st March 2029. 

B. Condition II

• The loan is taken before 1 April 1999.

C. Condition III

• The loan is taken on or after 1 April 1999 for the purpose of repairs or renewal of the house property.

Note: Interest deduction can only be claimed, starting in the financial year in which the construction of the property is completed.

How do I claim a tax deduction on a loan taken before the construction of the property is complete? 

• Deduction on home loan interest cannot be claimed when the house is under construction. 
• It can be claimed only after the construction is finished. 
• The duration between borrowing money to completion of construction is called pre-construction period. 
• Interest paid during this time is called as a pre-construction interest and can be claimed as a tax deduction in five equal instalments starting from the year in which the construction of the property is completed. 

For example, if the loan was taken on 30th April 2024, and the construction is completed by 31st March 2029, the period between April 2024 and March 2029 is called preconstruction period, and the interest paid during this period is called pre-construction interest.

How to Calculate the Gross Annual Value of the Let-out Property?

GAV should be calculated for both let-out property and deemed let-out property. Where the property is let out for the whole year, then the GAV would be higher of:

1. Expected Rent (ER): The expected rent is the higher of the fair rent and municipal value but is restricted to standard rent. It cannot exceed standard rent but can be lower than standard rent, but it can be more than fair rent and Municipal value.

For example, if Manoj owns a house that is let out, Determine the GAV, Muncipal value-Rs.80,000, Fair Rent –Rs.90,000, Standard Rent-Rs.75,000, Actual Rent-Rs.72,000.

Solution: 

Note: If the property is covered under the Rent Control Act, then the reasonable expected rent can not exceed the maximum recoverable rent from the tenant (also called Standard Rent)

2. Actual rent received or receivable during the year.

Actual rent means the rent for the property during the year, including rent during vacancy periods. If the conditions below are met, the unpaid rent will be subtracted from the actual rent. Unpaid/ un-realised rent is rent the owner couldn't collect if:

• The rental agreement is real.
• The tenant who didn't pay has left, or efforts have been made to make them leave.
• The tenant doesn't have another property belonging to the owner.
• The owner tried to get the rent, even legally or can prove legal action won't work.

Tax deductions under Old and New Regime

The following matrix shows the allowability of deduction for interest on housing loan under different tax regimes. 

b. Tax Deduction on Principal Repayment

The deduction to claim principal repayment is available for up to Rs. 1.5 lakhs within the overall limit of Section 80C. Check the principal repayment amount with your lender or look at your loan instalment details.

Conditions to claim this deduction-

• The home loan must be for the purchase or construction of a new house property.
• The property must not be sold within five years from the time you took possession. Doing so will add back the deduction to your income again in the year you sell.
• Stamp duty, registration charges and other expenses related directly to the transfer are also allowed as a deduction under Section 80C, subject to a maximum deduction amount of Rs 1.5 lakh. 
• Claim these expenses in the same year you make the payment for them.
• The property should be fully constructed for claiming deduction under section 80C.

Note: Deductions under chapter VIA is not allowed under new tax regime u/s 115BAC. Therefore, deduction for principal repayment, stamp duty and registration charges is not allowed under section 115BAC for new tax regime.

c. Tax Deduction for First-Time Homeowners: Section 80EE

Section 80EE recently added to the Income Tax Act provides the homeowners, with only one house property on the date of sanction of loan, a tax benefit of up to Rs 50,000.

d. Tax Deduction for First-Time Homeowners: Section 80EEA

A new section 80EEA is added to extend the tax benefits of interest deduction for housing loan taken for affordable housing during the period 1 April 2019 to 31 March 2022. The individual taxpayer should not be entitled to deduction under section 80EE.

These benefits are not available for an under-construction property.

Do you own more than one house?

If you own more than one house, you need to file the ITR-2 form.

Points to Remember while Claiming Home Loan Deductions

• The amount of deduction you can claim depends on the ownership share you have on the property.
• The home loan must also be in your name. A co-borrower can claim these deductions too.
• The home loan principal deduction can only be claimed from the financial year in which the construction is completed.
• Submit your home loan interest certificate to your employer for him to adjust tax deductions at source accordingly. This document contains information on your ownership share, borrower details and EMI payments split into interest and principal.
• Otherwise, you may have to calculate the taxes on your own and claim the refund, if any, at the time of tax filing. It’s also possible that you may have to deposit the dues on your own if there is a tax payable.
• If you are self-employed or a freelancer, you don’t have to submit these documents anywhere, not even to the IT Department. You will need them to calculate your advance tax liability for every quarter. 
• You must keep them safely to answer queries that may arise from the IT Department and for your own records.

Tax Benefits on Home Loans for Joint Owners

• If a property is jointly owned and both co-owners take a home loan, each can claim interest deduction up to ₹2 lakhs. 
• Co-owners can each claim up to ₹1.5 lakhs under Section 80C for principal repayment, stamp duty, and registration charges.
• These deductions are allowed to be claimed in the same ratio as that of the ownership share in the property.
• For claiming deduction like this, both the persons should be co-owners and both should have repaid principal and interest on home loans, stamp duty and registration charges. 

Therefore, to claim the tax benefits on the property:

1. You must be a co-owner in the property (and)
2. You must be a co-borrower for the loan

Therefore, you can avail a larger tax benefit against the interest paid on home loan when the property is jointly owned and your interest outgo exceeds Rs 2 lakh per year.

Set-off and Carry Forward of House Property Loss

• Under Old Regime, a maximum of Rs.2 lakhs losses can be set - off against income under other heads. 
• Carry forward of losses is also allowed. In subsequent years, the losses can be set-off against income from house property income only.
• Under New Regime, loss under house property cannot be set off under any other head. Carry forward of losses is also not allowed.

Case Study

Aditya earns rental income from his house in Vizag. See how his GAV and NAV are computed and how much he has to pay as taxes here.

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