Income from House Property and Taxes

Income from house property encompasses rental earnings from residential or commercial buildings, as well as adjoining land, owned by a taxpayer. Governed by Sections 22 to 27 of the Income Tax Act, it allows deductions such as the standard deduction, interest on housing loans, and property taxes. 

What is Income from House Property?

Income from House Property refers to rental income earned from letting out a building or land appurtenant thereto (such as parking space, garden, or courtyard). This includes residential houses, offices, shops, factories, or commercial complexes.

In short, any rental income from a property owned by a taxpayer whether residential or commercial will be taxed under "Income from House Property," unless it is used for their own business or treated as business activity.

As per Section 22 of the Income Tax Act, 1961, such income is taxable under the head "Income from House Property" if the following conditions are satisfied:

1. The property must consist of a building or part of a building, along with land attached to it.
2. The taxpayer must be the legal owner (or deemed owner under Section 27) of the property.
3. The owner should not use the property for their own business or profession. If it is used for business purposes, the income is taxable under Profits and Gains from Business or Profession instead.

Key Points to Note

• Rental income only – Income must be like rent or lease, whether received in periodic intervals or as a lump sum.
• Building and attached land – Rent received for land appurtenant to the building (e.g., parking lot, garden) is also considered house property income. However, if the payment is primarily for land, it is taxed under 'Income from Other Sources'.
• Not a business activity – If the taxpayer is in the full-fledged business of renting properties, the income is taxed as Business Income and not as House Property Income.
  • Example: Renting out one apartment = House Property Income.
  • Running a hostel with multiple rooms = Business Income.
• Residential or commercial property – Both residential and commercial rentals are treated as income from house property.
• Ownership is essential – The taxpayer must own the property. If a person sublets a rented property, the income is not taxed as house property income but under 'Other Sources'.
• Deemed owners are also covered – Even if the legal title is not in the taxpayer's name, income is taxable in the hands of the person who is considered the deemed owner under Section 27.

Concept of Deemed Ownership (Section 27)

• The concept of deemed ownership was introduced to avoid tax evasion practices.
• The owners of the property transferred it to other persons, (for example family members) and still enjoyed the control of the property, while shifting the tax implications to the transferee.
• Therefore, the person who exercises control over the house property will be deemed as the owner, whether the title is in his name or not. House property income is taxed in the hands of the deemed owner. 
• The following cases are provided in the act related to deemed ownership under section 27:
  • If a person transfers property to his spouse or minor child, the transferor is the deemed owner.
  • If a property cannot be divided among the heirs, the holder of the property is the deemed owner.
  • If a person is allotted a house under a co-operative housing scheme, the allottee is the deemed owner.
  • If a person is allowed possession under section 53A of transfer of property act, the possessor is the deemed owner.
  • If a person who is under a lease for a term more than 12 years, the lessee is the deemed owner.

Classification of House Property

Income tax classifies the properties in three 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. 

c. Deemed to be Let Out Property

• Any house property in excess of 2 self-occupied properties is deemed a let-out property.
• It is treated as a let-out property even if it is left vacant.

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.

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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