1. Basics of House PropertyA 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 a commercial and a 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. When a property is used for the purpose of business or profession or for carrying out freelancing work – it is taxed under the ‘income from business and profession’ head. Expenses on its repair and maintenance are allowed as business expenditure.
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 is considered as self-occupied for the purpose of Income Tax.
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.
b. Let Out House Property
A house property which is rented for the whole or a part of the year is considered a let out house property for income tax purposes
c. Inherited Property
When you inherit property from your father, you will be taxed like it is your own property. If you own more than one house property, only one house will be treated as self-occupied house property according to the I-T Department, while others are assumed and taxed as if they are on rent.
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2. Steps to Calculate Income From House Property
a. Gross Annual Value of the property: The gross annual value of a self-occupied house is zero. It is the rent collected for a house on rent.
b. Less Property Tax: Property tax, when paid, is allowed as a deduction.
c. Net Annual Value: Net Annual Value = Gross Annual Value – Property Tax
d. Less: 30% standard deduction on NAV: A standard 30% deduction on NAV is allowed as a deduction 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.
e. Less: Interest on the home loan: Deduction is allowed for Interest on the home loan.
f. Income from house property: The resulting value is your income from house property. This is taxed at the slab rate applicable to you.
g. Loss from house property: Since the gross annual value of a self-occupied house is zero, 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: 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.
3. Computation of Total Income and Income From House Property
|Particulars||AY 2017-18||AY 2018-19|
|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|
|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|
|(-) Interest on housing loan restricted to||2,00,000||2,00,000|
|Loss from House Property(A)||(2,00,000)||(2,00,000)|
|Net income from House Property after all deductions (B)||60,000||60,000|
|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|
4. Tax Deduction on Home Loans
a. Tax Deduction on Home Loan Interest: Section 24Homeowners can claim a deduction of up to Rs. 2 lakhs (Rs. 1.5 lakhs, if you are filing returns for FY 2013-14) 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 lakhs rebate. See all the conditions to claim the Rs. 2 lakhs rebate:
a. The home loan must be for purchase and construction of a new property
b. The loan must be taken on or after 1 April 1999
c. The purchase or construction must be completed within 3 years from the end of the financial year in which the loan was takenWhen is the deduction limited to Rs 30,000? When is the deduction limited to Rs 30,000?
If the construction of the property is not completed within 3 years, the deduction on home loan interest shall be limited to Rs. 30,000. The period of 3 years is calculated from the end of the financial year in which loan was taken. So, if the loan was taken on 30th April 2015. The construction of the property should be completed by 31st March 2019. (This period has been extended to 5 years in Budget 2016, which is applicable from the financial year 2016-17) Also, where the loan has been taken for reconstruction, repairs or renewal, only Rs.30,000 shall be allowed as deduction.
Note: The 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 can be claimed as a tax deduction in five equal installments starting from the year in which the construction of the property is completed. Understand pre-construction interest better with this example.
Note that a house doesn’t have to necessarily be occupied by the taxpayer for it to be considered a self-occupied house. Members of the family – spouse, parents, and children – may also be living there. If you own more than one house property, the I-T Department only counts one property as a self-occupied house. It treats all other houses as rented properties even if they are not rented at all. Rental income calculation is based on what rent a similar property in the area would earn. Click here to know how he can claim a deduction for interest on home loan.
b. Tax Deduction on Principal RepaymentThe deduction to claim principal repayment is available for up to Rs. 1,50,000 within the overall limit of Section 80C from FY 2014-15 onwards (Rs. 1 lakh if you are filing returns for last financial year). Check the principal repayment amount with your lender or look at your loan installment details. Conditions to claim this deduction-
- The home loan must be for purchase or construction of a new house property.
- The property must not be sold in five years from the time you took possession. Doing so will add back the deduction to your income again in the year you sell.
C. Tax Deduction for First-Time Homeowners: Section 80EE Section 80EE recently added to the Income Tax Act, provides a first-time homeowners tax benefit of up to Rs.50,000. 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.
5. 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.
6. Tax Benefits on Home Loans for Joint OwnersThe 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 lakhs 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 lakhs 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:
1. You must be a co-owner in the property
2. You must be a co-borrower for the loanSince, each co-owner can claim a deduction of maximum Rs 1,50,000 towards repayment of principal under section 80C. This is within the overall limit of Rs 1,50,000 of Section 80C. Therefore, as a family, you will be able to take a larger tax benefit against the interest paid on the home loan when the property is jointly owned and your interest outgo is more than Rs 2,00,000 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.
7. HRA and Deduction on Home LoanScenario 1 These benefits are not available for an under construction property. There may be a situation where you are paying the entire loan installment and the co-borrower is not contributing any payments. In such a case, you may claim the entire interest as a deduction on your Income Tax Return.Yes, you can enjoy both tax benefits if your employer provides you with an HRA component as part of your salary and you are repaying your home loan.
Scenario 2: 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 son’s school and his wife’s office are in Noida, his own house on the outskirts of Delhi is smaller and is 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
- HRA rent she pays for the house in Bangalore
- Entire interest on the home loan fully exempt from tax
8. Case Study
9. Frequently Asked Questions
What is your ‘income from house property’ when you/your family live(s) in it?If you are using your property for residence throughout the year and it’s not let out or used for any other purpose, it is considered a self-occupied house property. The gross annual value of this property is zero. There is no income from your house property. Note: Since the gross annual value of a self-occupied house is zero, claiming the deduction on home loan interest will result in a loss from house property. This loss can be adjusted against your income from other heads. Click here to read how Suresh made a loss on his home property due to his home loan.
I own a house of two floors and run my business out of the Ground Floor. I live on the 1st Floor. How much will I pay in taxes?The Ground Floor will not be taxed under “income from house property” head. It shall be taxed under Business Profession head.The first floor will be treated as a self-occupied house property. Income from house property will be zero in this case.
A house has been self-occupied for six months and rented out for six months. What is its income?Calculate the gross annual value of the property by finding out its reasonable rent and actual rent collected. If Actual Rent is lower than Reasonable Rent, only because the house was vacant and not for any other reason, take actual rent collected as Gross Annual Value. If Actual Rent is lower than Reasonable Rent because of other factors (say the tenant and the landlord are related), then take reasonable rent as GAV.
Income received as rent from sub letting of house property will be taxed under “Income from House Property”No. This is because rental income received by the owner of a property alone is taxed as “Income from House Property”. Rental income in the hands of anyone other than the owner shall be taxed under “Other sources”. Therefore, income from subletting will be chargeable under “Other Sources”.
Can a deduction of interest paid against loan taken from friends and relatives be claimed from house property income?Yes. A deduction under Section 24 for interest paid on loan availed from friends or relatives is also allowed from the Net Annual Value. The law nowhere mandates that the loan should have been taken only from a bank to claim this deduction. But here, one must note that the principal repayment in respect of such a loan will not qualify for a deduction under Section 80C
I have taken a home loan from a bank for construction of a house in June 2015. The construction of the house is complete in June 2018. I have started paying the EMI for the home loan taken from July 2015. Will I not get any benefit of the home loan repayment made between July 2015 and June 2018 as the construction is complete only in June 2018?The income tax law allows you to claim pre-construction interest as a deduction from the Net Annual Value, which is nothing but the interest payment on home loan made between the date of borrowing and date of completion of construction. This interest can be claimed in 5 equal installments beginning the year of completion of construction besides the regular interest claim.
How does the claim of deduction under Section 24 and Section 80C work if a home loan has been availed for 2 houses?A taxpayer can claim deduction under Section 24 of interest paid on home loan for each of the houses separately. However, the overall loss from house property that can be claimed for a year is restricted to Rs 2 lakhs. As regards 80C deduction, the principal portion of home loan repaid in respect of both houses can be claimed, however within the overall cap of Rs 1.5 lakhs for each financial year.
I have been employed with 2 employers during the same year and because my income did not cross the basic exemption limit under each of the employers, no TDS was done. Should I pay any income taxes on my own?Even if TDS has not been made by any of your employers, in case you have a taxable income after claiming all deductions applicable to you, you will have to pay taxes yourself which is called Self Assessment Tax
What is a self-occupied property, let out property and deemed let out property?Self-occupied: Is one where you or your family resides and question of receiving rental income out of this does not arise Let Out: Is one which you have given out on rent. Therefore, the rental income would be considered as your income from house property. Deemed Let out: When a taxpayer owns more than one house property, the law mandates that only one such property can be treated as self occupied while the other (irrespective of whether let out or not) will be deemed to be let out.
I have incurred a loss from house property. I have missed the return filing deadline. Will I lose the benefit of carry forward of losses incurredOne is supposed to file his return within the due date which is 31 July for most of the individual taxpayers. If this is not done, losses if any, would not be allowed to be carried forward to future years for set off. However, losses from house property is an exception to this rule and can be carried forward to future years even if return is not filed on time.
I have paid municipal taxes on my flay pertaining to the year 2017-18 in April 2018. Can I claim deduction of such taxes for FY 2017-18 (AY 2018-19)?Municipal taxes are always allowed as a deduction only on payment basis. Though you have paid taxes pertaining to FY 2017-18, since the payment has been made in April 2018 i.e. FY 2018-19, it will be allowed for FY 2018-19 only as a deduction from Gross Annual Value
I am the owner of a shop space which I have given out on rent. How should I offer such income to tax?If rent has to be charged to tax under “Income from House Property”, the property that has been given on rent must be a building or a land appurtenant thereto. Since the shop falls under the definition of a building, the rental income from such shop must be offered to tax under “House Property only”.
I have transferred my flat in the name of my wife as a gift. She receives monthly rental from this flat. Should she offer this as her income?Since the flat has been given to your wife as a gift i.e. for nil consideration, you will be considered as the “deemed owner” of the house and the income from renting the flat will be clubbed in your hands and you must offer the same to tax as house property income.
I have received an unrealised rent which were arrears in earlier years. What will the tax treatment for such realisation of arrears of rent?Since the unrealised rent was excluded from “Income from house property” in the previous years due to non- realisation , you will have to include this income in the year of receipt of arrears of rent . It is not necessary to be the owner of the property in the year of receipt. You can also deduct 30% of such rent while charging it to income tax.
I have 6 separate let out properties.Should I calculate the house property income for each individual property or by clubbing all the rental receipts in one calculation?The calculation will have to be made separately for each of the properties.
I own a property which was self occupied from April 2017 to September 2017 and then was let out from October 2017 to February 2018. How will I compute my Income from house property ?For the purpose of computing Income from house property, such property will be considered to let-out throughout the year. However, actual rent received will only be considered for let-out period i.e October 2017 to February 2018.
How to compute income from a house property, when part of the property is self occupied and part is let-out?If a house property consist of 2 or more units, one of which is self occupied and the remaining units are let-out then the all the units will be treated as independent units and income from those units will be computed in the following manner Income from unit occupied by the owner will be computed as Self Occupied property income, and
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