MAR 19
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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.
Budget 2025 Update
Previously, the annual value of up to two self-occupied properties was deemed to be nil if the owner is unable to occupy the property due to employment, business, or professional commitments at a different location. It is now proposed that the annual value of up to two house two house properties shall be nil if the owner occupies the house for his own residence or cannot occupy it for any reason.
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.
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 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.
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.
If the owner of the property occupies it for carrying out his own business or profession, the annual value is not chargeable to tax.
Income from house property is taxed based on annual value. Here is how you compute your income from a house property:
a. Determine Gross Annual Value (GAV) of the property:
b. Reduce Property Tax: Property tax, when paid, is allowed as a deduction from GAV of the property.
Note:
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:
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:
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 |
Let's consider a property with the following details:
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 |
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
B. Condition II
C. Condition III
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.
The following matrix shows the allowability of deduction for interest on housing loan under different tax regimes.
Particulars | Self Occupied Property | Let Out Property |
New Tax Regime u/s 115 BAC | Not Allowed | Allowed |
Old Tax Regime | Allowed upto Rs.2,00,000 | Allowed |
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-
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.
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.
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.
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.
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:
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.
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:
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:
Income from the following properties are excluded from the income from house property:
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.
Get help on your income taxes and tax filing. The experts can prepare your tax returns and e-file within 48 hours. Plans start at Rs. 800 for taxpayers with income from house property.
Check out the Expert Assisted Plans → Didn’t find what you’re looking for? Relax! You can write all your doubts at support@cleartax.in. Our experts will be happy to help you.
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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