Income from House Property and Taxes
Income tax on house property: Owning a house one day – everybody dreams of this, saves towards this and hopes to achieve this one day. However, owning a house property comes with regulatory and tax compliances. Paying house property taxes annually is one of them. If you want to know how to save tax on home loan interest, this article is for you. It also talks about how to report home ownership in your income tax return.
Latest update: It is proposed that the cost of acquisition of a property should not include any home loan interest claimed as an income-tax deduction by the seller throughout the holding term for computing capital gains from the sale of a residential property.
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 does not differentiate between commercial and residential property. All types of properties are taxed under the head ‘income from house property’ in the income tax return. 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. This may be occupied by the taxpayer’s family – parents and/or spouse and children. A vacant house property can also be considered self-occupied for the purpose of Income Tax.
Prior to FY 2019-20, if more than one self-occupied house property is owned by the taxpayer, only one is considered and treated as a self-occupied property and the remaining are assumed to be let out. The choice of which property to choose as self-occupied is up to the taxpayer.
From the FY 2019-20 and onwards, the benefit of considering the houses as self-occupied has been extended to 2 houses. Now, a homeowner can claim his 2 properties as self-occupied and 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. A 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).
There is one more term used in practical life - Inherited Property
An inherited property is one which is one bequeathed from parents, grandparents, etc. and again, can either be a self-occupied one or a let-out one based on its usage as discussed above.
Note: Income from letting out of vacant land is taxable under the head “Income from Other Sources” or “Profits or gains from business or profession”.
How to Calculate Income from House Property?
Here is how you compute your income from a house property:
a. Determine Gross Annual Value (GAV) of the property: The gross annual value of a self-occupied house is zero. GAV for let out property is rent for a let-out property. In case of deemed let out property GAV is the market value of the rent received.
b. Reduce Property Tax: Property tax, when paid, is allowed as a deduction from GAV of the property.
Note: The property taxes which the owner pays during the previous year are only to be deducted to arrive at NAV.
c. Determine Net Annual Value(NAV) : Net Annual Value = Gross Annual Value – Property Tax
d. Reduce 30% of NAV towards standard deduction: 30% on NAV is allowed as a standard deduction from the NAV under Section 24 of the Income Tax Act. No other expenses such as painting and repairs can be claimed as tax relief beyond the 30% cap under this section. You can claim 30% expense deduction even if you have not actually incurred the expenses.
e. Reduce home loan interest: A deduction under Section 24 is also available for interest incurred on a housing loan used to purchase or construct a property. In the case of construction, however, the interest deduction is available only after the completion of the construction.
f. Determine Income from house property: The resulting value is your income from house property. This is taxed at the slab rate applicable to you. In case you are opting for new regime interest deduction on housing loan is available only in case of let out property.
g. Loss from house property: When you own a self-occupied house, since its GAV is Nil, claiming the deduction on home loan interest will result in a loss from house property. This loss can be adjusted against income from other heads.
Note:
- There is no limit for set-off of house property loss with house property income. However, there is a limit of Rs. 2 lakhs against the set-off of house property loss to income from other heads.
- If the loss exceeds Rs. 2 lakhs in a year, the excess loss can be carried forward for 8 years. However, in the subsequent years, it could be only set off under the same head “Income Under Head House property".
- When a property is let out, its gross annual value is the rental value of the property. The rental value must be higher than or equal to the reasonable rent of the property determined by the municipality.
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:
Particulars | Amount |
1. Municipal Value | Rs.80,000 |
2. Fair Rent | Rs.90,000 |
3. Higher of (1)and (2) | Rs.90,000 |
4. Standard Rent | Rs.75,000 |
5.Expected Rent(Lower of (3) and (4) | Rs.75,000 |
6. Actual Rent Received | Rs.72,000 |
7. Gross Annual Value(GAV) Higher of (5) and (6) | Rs.75,000 |
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/ Unrealised 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.
House Property Income Calculation
Particulars | Amount |
Gross annual value | XXXX |
Less: - Municipal taxes paid during the year | XXXX |
Net Annual Value (NAV) | XXXX |
Less: - Deduction |
|
- under section 24(a) @ 30% of NAV | XXXX |
- under section 24(b) on interest | (XXXX) |
Income from house property | XXXX |
Example of Calculation of Income for House Property
Let's consider a property with the following details:
- Gross annual value: Rs. 5,00,000
- Municipal taxes paid during the year: Rs. 20,000
- Interest on loan borrowed for the year: Rs. 1,00,000
Particulars | Amount |
| 5,00,000 20,000 |
Net Annual Value (NAV) | 4,80,000 |
Less: - Deduction under section 24
|
1,44,000
1,00,000 |
Income from house property | 2,36,000 |
Tax Deduction on Home Loans
a. Tax Deduction on Home Loan Interest: Section 24
Homeowners can claim a deduction of 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.
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.
When is the deduction limited to Rs 30,000?
As already mentioned, if the construction of the property is not completed within 5 years, the deduction on home loan interest shall be limited to Rs. 30,000. The period of 5 years is calculated from the end of the financial year in which loan was taken. So, if the loan was taken on 30th April 2017, the construction of the property should be completed by 31st March 2023. (For years prior to FY 2016-17, the period prescribed was 3 years which got increased to 5 years in Budget 2016).
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 period from borrowing money until construction of the house is completed 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. Understand pre-construction interest better with this example.
b. Tax Deduction on Principal Repayment
The deduction to claim principal repayment is available for up to Rs. 1,50,000 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 and registration charges Stamp duty and 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.
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.
Click here to read more. 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.
Read our guide to ITR-2 form here.
Claiming Deduction on Home Loan
- 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 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
The joint owners, who are also co-borrowers of a self-occupied house property, can claim a deduction on interest on the home loan up to Rs 2 lakh each. And deduction on principal repayments, including a deduction for stamp duty and registration charges under Section 80C within the overall limit of Rs.1.5 lakh for each of the joint owners. These deductions are allowed to be claimed in the same ratio as that of the ownership share in the property.
You may have taken the loan jointly, but unless you are an owner in the property – you are not entitled to the tax benefits. There have been situations where the property is owned by a parent and the parent and child together take up a loan which is paid off only by the child. In such a case the child, who is not a co-owner is devoid of the tax benefits on the home loan.
Therefore, to claim the tax benefits on the property:
- You must be a co-owner in the property
- You must be a co-borrower for the loan
Each co-owner can claim a deduction of maximum Rs 1.5 lakh towards repayment of principal under section 80C. This is within the overall limit of Rs 1.5 lakh of Section 80C. 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.
It’s important to note that the tax benefit of both the deduction on home loan interest and principal repayment under section 80C can only be claimed once the construction of the property is complete.
HRA and Deduction on Home Loan
Scenario 1: You live in a rented accommodation since your house is too small for your needs Raghav lives in a rented house in Noida since his own office, son’s school and his wife’s office are in Noida, He has his own house in the outskirts of Delhi which is quite small and also lying vacant. He is paying interest on the loan on his own house. Raghav can claim:
- HRA for rent he pays for the house in Noida, and
- Deduction on interest up to Rs 2,00,000 on the home loan
Scenario 2: You live in a rented house; your own house is also let out Neha recently bought a flat in Indore, though she lives and works in Bangalore. She has no plans of returning to Indore in the next five years so she gives that flat on rent. She lives on rent in Bangalore. Neha can claim:
- HRA for the rent she pays for the house in Bangalore and
- Claim the entire interest she pays during the year on the home loan
Exclusions to Income From House Property
The following house properties are excluded from the income computation:
- Farmhouses contributing to agricultural income
- Any palace in the occupation of an ex-ruler
- Property of a local authority
- Property of any registered trade union
- Property of a member of a Scheduled tribe;
- Statutory corporation or an institution or association financed by the Government for promoting the interests of the members either of the Scheduled Castes or Scheduled tribes or both
- Any corporation established by the government to promote the interests of members of a minority group
- Any cooperative society formed for promoting the interests of the members either of the Scheduled Castes or Scheduled tribes or both
- Property Income from the letting of warehouses for storage, processing or facilitating the marketing of commodities by an authority constituted under any law for the marketing of commodities
- Any institution for the development of ‘Khadi and Village Industries’
- Self-occupied house property of an individual which has not been rented throughout the previous year
- House property held for any charitable purposes
- Property of any political party
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.
Significant Budget Amendment in 2017 – Impact Explained with an Example
Till FY 2016-17, loss under the head house property could be set off against other heads of income without any limit. However, from FY 2017-18, such set off of losses has been restricted to Rs 2 lakhs. This amendment would not really affect taxpayers having a self-occupied house property. This move will have an impact on taxpayers who have let-out/ rented their properties. Though there is no bar on the amount of home loan interest that can be claimed as a deduction under Section 24 for a rented house property, the losses which could arise on account of such interest payment can be set off only to the extent of Rs 2 lakhs.
Here is an example to help you comprehend the impact of the amendment:
Particulars | AY 2017-18 | AY 2018-19 |
Salary income | 10,00,000 | 10,00,000 |
Income from other sources (Interest income) | 4,00,000 | 4,00,000 |
Income from house property (*) | (4,40,000) | (2,00,000) |
Gross Total Income | 9,60,000 | 12,00,000 |
Deductions | 2,00,000 | 2,00,000 |
Taxable income | 7,60,000 | 10,00,000 |
Tax on the above | 77,000 | 1,12,500 |
Additional tax outgo excluding cess in AY 2018-19 on account of the amendment |
| 35,500 |
Workings for Income from House Property
Particulars | AY 2017-18 | AY 2018-19 |
Property A |
|
|
Annual Value | Nil | Nil |
(-) Interest on housing loan restricted to | 2,00,000 | 2,00,000 |
Loss from House Property(A) | (2,00,000) | (2,00,000) |
Property B |
|
|
Net income from House Property after all deductions (B) | 60,000 | 60,000 |
Property C |
|
|
Annual Value | 5,00,000 | 5,00,000 |
Less : Standard Deduction | 1,50,000 | 1,50,000 |
Less : Interest on loan | 6,50,000 | 6,50,000 |
Loss from House Property (C) | (3,00,000) | (3,00,000) |
Total income from house property (A+B+C) | (4,40,000) | Restricted to (2,00,000). Balance loss of Rs 2.4 lakhs can be carried forward for the next 8 AYs |
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Also read about:
1. How To Save Income Tax On Your Home Loan?
2. Section 80EE - Deduction for Interest on Home Loan
3. Section 24 - Deductions From House Property Income
4. Section 80EEA - Deduction for Interest Paid on Home Loan
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