Buying a home is one of the most common long-term investment goals for most Indians. A great chunk of one’s income goes towards home loan EMI. So, the government has given plenty of tax benefits for house property under Section 24 of the Income Tax Act.
Income from House Property
The following income will be taxable under the head ‘Income from house property’ of the Income tax act, 1961.
- Rental Income on a let out property
- Annual Value of a property which is ‘deemed’ to be let out for income tax purposes ( when you own more than two house property)
- The annual Value of a self-occupied property is Nil.
The annual Value of a self-occupied property is zero or can even be negative if home loan interest is paid. If the property is let out, its rent received is your Gross Annual Value. For a deemed to be let out property, a reasonable rent of a similar place is your Gross Annual Value.
Deductions Under House Property
- Municipal tax – Municipal taxes is the annual amount paid to the municipal corporation of that area. Municipal taxes are to be deducted from the Gross Annual value to derive the Net annual value of the house property. Deduction of municipal tax is allowed only if it has been borne by the owner and paid during that financial year.
- Standard Deduction – Standard Deduction is 30% of the Net Annual Value calculated above. This 30% deduction is allowed even when your actual expenditure on the property is higher or lower. Therefore, this deduction is irrespective of the actual expenditure you may have incurred on insurance, repairs, electricity, water supply etc. For a self-occupied house property, since the Annual Value is Nil, the standard deduction is also zero on such a property.
- Deduction of Interest on Home Loan for the property –Homeowners can claim a deduction of up to Rs.2 lakh on their home loan interest if the owner or his family reside in the house property. The same treatment applies when the house is vacant. If you have rented out the property, the entire interest on the home loan is allowed as a deduction. Your deduction on interest is limited to Rs.30,000 if you fail to meet any of the conditions given below for the Rs.2 lakh rebate.-
- The home loan must be for the purchase and construction of a property;
- The loan must be taken on or after 1 April 1999;
- The purchase or construction must be completed within 5 years from the end of the financial year in which the loan was taken
Pre Construction Interest
When you have taken a loan for the purchase or construction of a house property, you can claim a deduction on pre-construction interest. However, this is not allowed in the case of the loan for repairs or reconstruction.
The total amount of pre-construction interest and interest on a housing loan that can be claimed in a year should not exceed Rs 2 lakh in any case. 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.
For example, if the construction of your property completed in FY 2018-19, on 25 June 2018, you can claim 1/5th of interest paid up till 31 March 2018 when you file your return for FY 2018-19.
Conditions for Claiming Interest on Home Loan
You need to meet all the below 3 conditions to claim this deduction
- The loan has been taken after 1st April 1999 for purchase or construction
- The acquisition or construction is completed within 5 years (3 Years till FY 2015-16) from the end of the financial year in which the loan was taken
- There is an interest certificate available for the interest payable on the loan. Note that your interest deduction may be limited to Rs 30,000 if any one of these conditions is met –
- The loan is borrowed before 1st April 1999 for purchase, construction, repairs or reconstruction of house property
- The loan is borrowed on or after 1st April 1999 for purchase, construction, repairs or reconstruction of house property.
Computation of Income Under House Property
Say, a person repays a housing loan of Rs 4 lakh annually out of which Rs 2 lakh is the interest component. He has also incurred a pre-construction interest of Rs 3 lakh. He is earning Rs 7000 monthly from a let-out property and also pays municipal taxes of Rs 3000 for the house. Let’s calculate his Income from house property in both the scenarios: 1. He has a self-occupied property, or 2. The property is rented out
|Type of House Property||Self Occupied||Let Out|
|Gross annual Value (Rent paid- 7000*12)||NIL||84,000|
|Less: Municipal Taxes or Taxes paid to local authorities||NA||3,000|
|Net Annual Value(NAV)||Nil||81,000|
|Less: Standard Deduction(30% of NAV)||NA||24,300|
|Less: Interest on Housing Loan||200,000||200,000|
|Less: Pre-construction interest (1/5th of 3 Lakhs)||60,000||60,000|
|Income from House Property||(260,000)||(203,300)|
|Overall loss restricted to||(200,000)||(200,000)|
Remember, the maximum loss set-off allowed in a financial year is limited to Rs 2 lakh. The remaining loss can be carried forward to future years – 8 years in total. However, in these 8 years, it can only be set off from income from house property.
Example of claiming deductions under the following scenario:
- Mr X has 3 house property, 2 are self-occupied, 1 of them is offered for rent. Interest paid on a home loan of both the self-occupied properties is Rs 3.00 lakhs and interest paid on rent out a property is Rs. 2.5 lakhs. What all deductions can be claimed by him under house property income?
- Self-occupied properties:
- After the amendment in Budget 2019, Mr X can claim two property as self-occupied properties with annual as Nil. Previous to 2019, only one property was claimed as self-occupied, the notional rent of the 2nd property was taxable.
- Mr X can claim a maximum of Rs. 2.00 lakh of the aggregate deduction (for both the self-occupied properties) against actual home loan interest paid of Rs 3 lakhs.
- As the annual value of self-occupied properties is considered nil, house property income will become negative after claiming home loan interest. This negative amount can be set off against other income of the current year. Also, the loss amount can be carried forward for the next 8 AYs which can be set off against future house property income only.
- Rented property:
- In the case of rented property, actual rent received or receivable will be considered as a ‘ Gross annual value’
- Deductions like municipal taxes paid, actual interest on housing loan (no ceiling limit for claiming interest on let out property) will be allowed as deduction. Here, Mr X can claim actual home loan interest paid of Rs. 2.5 lakhs as a deduction for the let out property.
- Mr X can also claim a deduction of up to Rs. 1.5 lakh for principal repayment under section 80C which will be the aggregate of all home loan repayments.
- Further, it should be noted that in case Mr X opts for a ‘New tax regime’ for FY 2020-21, the deduction for interest on home loan as well as 80C deduction for repayment of the principal amount of loan will not be eligible. Also, one cannot set off the house property loss against any other head of income.
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