Budget 2023 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.
Income tax on house property: On Owning a house one day – everybody dreams of this, saves towards this and hopes to achieve this one day. However, owning a house property is not without responsibilities. Paying house property taxes annually is one of them. If you want to learn how to save tax on home loan interest, this guide 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.
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.
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.
For 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 remaining house as let out for Income tax purposes.
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
An inherited property i.e. one bequeathed from parents, grandparents, etc. again, can either be a self-occupied one or a let-out one based on its usage as discussed above.
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. For a let out property, it is the rent collected for a house on rent.
b. Reduce Property Tax: Property tax, when paid, is allowed as a deduction from GAV of property.
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 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.
e. Reduce home loan interest: Deduction under Section 24 is also available for interest paid during the year on housing loan availed.
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.
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: 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.
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 2015, the construction of the property should be completed by 31st March 2021. (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 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 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 on them.
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 2020. 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 on 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:
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.
Till FY 2016-17, loss under the head house property could be set off against other heads of income without any limit. However, form 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|
|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|
|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|
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.
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.
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.
No. This is because rental income received by the owner of 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”.
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.
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 instalments beginning the year of completion of construction besides the regular interest claim.
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.
Self-occupied: Is one where you or your family resides and the 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 two house property, the law mandates that only two (Prior to Budget 2019, it was only one property) such properties can be treated as self-occupied while the third one (irrespective of whether let out or not) will be deemed to be let out.
One 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.
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
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”.
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.
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.
The calculation will have to be made separately for each of the properties.
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.
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:
HRA exemption (section 10-13a) and deduction for home loan instalment (section 80C) and interest are governed by different sections. And hence employees can claim both of them. House rent allowance is to be claimed either by submitting proofs like rent receipts and rent agreement to the employer before the end of the year. Here it is to be noted that HRA cannot be claimed if you are a joint owner of the property and paying rent to the other owner or employee rents out the employer’s property and pays him the rent. But please note that this situation can be monitored closely by the income tax department and the department may disallow the claims if proper documents or explanations are not available.
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Also read about:
1. How To Save Income Tax On Your Home Loan?