Table of contents
- What is House Property Income
- Types of House Property
- Income from House Property
- Municipal Taxes Deduction
- Interest on Loan Deduction
- Annual Value of Self-occupied Residential Property
- Calculation of Income from Self-Occupied Property
- Deductions of Income From House Property
What is House Property Income
Any building or land attached to it that is owned by the assessee is considered to be house property. House properties could be your own home, office, a shop, or even a building that is attached to the building like a parking lot. This could also include the land that surrounds the building.
Besides, ‘house property’ includes flats, shops, office factory sheds, agricultural land and farmhouses. Even if the house property is situated outside India it is taxable in India if the owner-assessee is resident in India.
There is no distinction between commercial property and residential property under the Income Tax Act.
As far as income taxes are concerned, every type of above property becomes taxable under the head’s income from house property in the tax return.
Types of House Property
There are the following house properties
- Let out Property
- Self Occupied Property
- Deemed to be Let out Property
Let Out House Property: When it comes to income tax purposes, a house property that is rented for the entire year or a portion of it is considered a let-out house property.
Self-Occupied Property: A self-occupied property is one owned by the taxpayer that is used by the owner throughout the year for their own residence and isn’t rented out at any time. Many people are confused about the self-occupied property, since if the owner is not using the property for his residence, is it considered self-occupied? Even if the owner does not use the property for his residence throughout the year, the property will still be treated as self-occupied if all the following conditions are met.
- The assessee owns the property;
- There is no use of the property for his employment, business, or profession carried on at any other place, and he resides at that other place in a building he does not own.
- Throughout the year, the property is never rented;
- Such properties do not provide any other benefits.
Deemed to be Let out Property: If a person has more than two such properties, the Self Occupied Property benefit will be granted only to the two properties that he selects, and the other property/properties will be considered “deemed to be let out.”. A property that is deemed to be let out is calculated in the same manner as a property that is let out. A person is allowed to claim two properties as self-occupied house properties from Assessment Year 2020-21.
Updates for F.Y.2019-20: 2 houses will be considered self-occupied for FY 2019-20 and onwards. For income tax purposes, a homeowner can claim two properties as self-occupied and the remaining house will be treated as deemed to let out properties.
Income from House Property
Now, let’s discuss how we will calculate the income from house property in the case of self-occupied, let-out and deemed to be let-out property.
Step 1: The first step is to determine the property’s Gross Annual Value (GAV). The GAV of Self-Occupied property is zero. A property that has been let out will have a GAV equal to the rent collected.
Step 2: Deduct Property Taxes: When property taxes are paid, the amount can be deducted from the GAV of a property.
Step 3: Net Annual Value is obtained after deducting property tax from Gross Annual Value.
Step 4: Deduct Standard Deduction: Now, deduct 30% of Net Annual Value (NAV) as a deduction. Section 24(a) allows a standard deduction of 30% of Net Annual Value (NAV) from a house property that is let out or deemed to be rented out. However, you are not allowed to deduct any other expenditures in the form of insurance, repair, ground rent, collection charges, water charges, etc.
Step 5: Deduct Home Loan Interest Deduction: In this section, you can deduct interest on home loans taken for the purchase, construction, reconstruction, and repair of your home
As a result, we can now see if the house property has generated income or loss.
|Let-Out Property||Self-Occupied Property||Deemed to Let-Out Property|
|Gross Anuual Value (GAV)||xx||Nil||xx|
|Less: Municipal Taxes Paid||-xx||Not Applicable/Not Allowed to Deduct||-xx|
|Net Annual Value (NAV)||xx||Nil||xx|
|Less: Deduction u/s 24|
|(i) Standard Deduction @ 30% of NAV||-xx||Not Applicable||-xx|
|(ii) Interest on Home Loan||-xx||Limit to Rs. 2 Lakh (for Construction)||-xx|
|Income from House Property||xx||-xx||xx|
Municipal Taxes Deduction
- The local taxes such as municipal tax, water and sewage tax, fire tax, and education cess are allowed to deduct while computing the annual value of the year. P
- The municipal taxes are actually paid. It is only allowed as a deduction if it is actually paid.
- It is only allowed if it is paid by the owner.
Interest on Loan Deduction
- Interest on a loan is allowable as a deduction if it is taken for the purpose of construction, repair, or renovation of a house property.
- The loan may be taken from banks, financial institutions trusts, friends, family etc.
- Interest is allowed on a due basis (Actually Paid – Allowed, Outstanding – Allowed)
- The penal interest is not allowed as a deduction (which means the interest on interest is not allowed).
- Pre-Construction/Acquisition Interest: It means interest paid before the year in which construction was completed. It is allowed in five equal instalments from the year in which construction was completed.
Max Deduction on Interest on Loan
Let out Property/Deemed to Let out Property: There is not limit for deduction, The whole interest paid on loan will be allowed as deduction.
Self-Occupied Property: The maximum deduction will be allowed up to Rs. 2 Lakh if the following conditions are satisfied.
- The loan is taken on or after 1st April 1999
- The loan is taken for purchase or construction of house property.
- If the loan is taken for construction then construction should be completed within 5 years from the end of the year in which the loan was taken
In all other cases, the max deduction will be allowed up to Rs.30,000/-
|Interest on capital borrowed on or after 1-4-1999 for acquiring or constructing the house property and acquisition/construction is done within 5 years from the end of the financial year in which the capital is borrowed||Maximum Rs. 2,00,000|
|Interest on capital borrowed on or after 1-4-1999 for repair, renewal or reconstruction of property, or any other case not covered in (a) above||Maximum Rs. 30,000|
|Interest on capital borrowed before 1-4-1999 for acquiring, constructing, repairing, renewing or reconstructing the property||Maximum Rs.30,000|
- Brokerage or commission paid to arrange a loan will not be allowed.
- No other deduction by way of repairs, collection charges, insurance premium, annual charge, ground rent, etc. is allowable.
- Where a fresh loan has been raised and used to repay the original loan, the interest paid on the second loan would also be allowed as a deduction under the clause. This rule is applicable even if the first loan was interest-free.
- Interest payable on interest will not be allowed.
Annual Value of Self-occupied Residential Property
One House: Where the property consisting of one house or a part of a house is in the occupation of the owner for his own residence, and is not actually let during any part of the previous year and no other benefit therefrom is derived by the owner, the annual value of such a house or a part of the house shall be taken to be nil.
More Than Two House: Where the assessee is the owner of more than two such houses used for the purposes of his own residence, the annual value in respect of two of such houses which the assessee may specify on this behalf shall be taken to be nil provided the other conditions are satisfied. An assessee may specify different houses as self-occupied in different years. However, the annual value of other such houses (other than the two specified), shall be calculated as if these were let out.
Because of Employment of Business on Another Place: Where the owner has only one residential house which cannot be occupied by him owing to his employment, business or profession, carried on at any other place, and he has to reside at that other place in a building not belonging to him, the annual value of such a house shall be taken to be nil provided that the house is not actually let and no other benefit therefrom is derived by the owner, ignoring the fact of self-occupation of such property for any part of the year.
More Than two House: Where the assessee is the owner of more than two such houses which cannot be occupied by him owing to his employment, business or profession carried on at some other place, the annual value in respect of two of such houses which the assessee may specify in this behalf shall be taken to be nil, provided the other conditions are satisfied. However, the annual value of other such houses (other than the two specified), shall be calculated as if these were let out.
Annual Value of Partly Let-out and Partly Self-occupied Property: Where a part of property is let-out and a part of it is self-occupied, then the annual value of the different parts shall be determined separately as per the relevant provisions.
Annual Value of House Property Self-occupied for Part of the Year: Where a house property is self-occupied for part of the year and remained vacant for the rest of the year, its annual value shall be deemed as nil. However, where a house property is self-occupied for part of the ear and let out for any part of the year, its annual value shall be determined as if the property is let-out.
Updates – Amendment by Finance Act 2019(In Case of Builder): Where the house property is held as stock-in-trade and the property or any part of the property is not let during the whole or any part of the previous year, the annual value of such property or party of the property, for the period up to two years from the end of the financial year in which the certificate of completion of constructions of the property is obtained from the competent authority, shall be taken to be NIL.
Calculation of Income from Self-Occupied Property
A self-occupied property means a property which is occupied throughout the year by the taxpayer for his residence. Let’s understand the calculation of income from the self-occupied property for example.
Suppose Mr Arun has a residential house which he bought during 2012-13. We will calculate the income from house property for the Assessment year 2022-23 as per the following detail.
|Particulars||Amount in Rs.|
|Annual Letting Value||75000|
|Municipal Rateable Value||70000|
|Municipal Taxes due but not paid (Due)||2500|
|Expenditure on repairs||10000|
|Insurance premium due but not paid||500|
|Interest payable on money borrowed for construction||176000|
|Repayment of house loan||224000|
Solution with explanation
|Particulars||Amount in Rs.|
|Gross Annual Value
Note: The annual value of the property is NIL. In respect of such property, no other deduction is allowed by way of interest on borrowings for the purchase/construction of the house.
|Less: Municipal taxes paid during the year
Not: Mr Arun has not paid it yet. It is due on his side
|Net Annual Value||Nil|
|Less: Deduction u/s 24
– Interest on borrowed capital for constructions
Notes: Loss from a self-occupied property can be adjusted from any other head of income including let-out property income. W.e.f. 2018-19 such set-off shall be allowed subject to a maximum of Rs. 200000. The loss from house property which cannot be so set off shall be carried forward for the next 8 years.More detail on Set off & Carry Forward of Losses Here
Strategic use of these deductions can save a lot of tax for an assessee. However, when it comes to determining the exact tax liability, make sure that you avail a professional’s assistance who can understand your current affairs in detail and offer you the best guidance. Be smart and choose the most effective way to pay your taxes!
Deductions of Income From House Property
Deduction u/s 24
- Let-out property: Entire interest amount paid on the housing loan taken for the purpose of acquisition, construction, repairing, and re-construction is allowed as a deduction.
- Self-occupied house property: Interest paid on housing loans taken for the purpose of acquisition or construction of house property is allowed as a deduction up to Rs. 2,00,000. If the loan is taken for the purpose of reconstruction, repairs or renewals of property, then the amount of deduction is restricted to Rs. 30,000.
- In addition to contributions under notified schemes of the National Housing Bank, repayments of loans to notified bodies are eligible for deductions under section 80C within an overall limit of Rs.1,50,000.
- The benefit of this section is applicable to taxpayers who have availed of a loan for the purpose of purchasing a residential house property. Usually, the instalment is computed on the basis of Equated Monthly Installment or otherwise more commonly known as EMI.
- There are two sections which compromise EMI- Principle and Interest.
- An assessee can claim a deduction for the principal amount under section 80C. The deduction of interest can be claimed under section 24.
- The scope also allows the inclusion of expenses such as stamp duty and other expenditures made on account of facilitating house loans.
- The total amount available for deduction is INR 1, 50, 000 including all other deductions under section 80C.
Condition to Get Deduction u/s 80C for Principal Amount
- The home loan must be taked for purchase or construction of a new house property.
- You cannot sell the property within five years of taking possession. Your income will be added back to your deduction again in the year of sale if you do this.
Deduction u/s 80EE and 80EEA
- Section 80EE allows deduction for interest on housing loans taken between 1.4.2016 and 31.3.2017 from a bank or housing finance company, up to a maximum of Rs.50,000.
- Under section 80EEA, a maximum deduction of Rs. 1,50,000 can be claimed for interest on a residential loan taken from a bank or housing finance company from 1.4.2016 to 31.3.2022.
- Assessees opting for alternate tax regimes are not allowed to deduct interest on housing loans under section 80EE or 80EEA.
- It is possible, however, to deduct interest from the rental income from a home property if it is rented out.