Owning and managing a house property can get complicated for many. House owners need to spend time calculating things like taxes to be paid on income from properties, tax benefits, and other matters like paying property tax. In this article, we’ll take a close look at the taxes on income from house property. We will also look at the various tax breaks that house owners can benefit from.
Let’s understand what classifies as ‘Income from House Property’. Income will be classified as income from house property under Section 24 of the Income Tax Act, 1961 if the given conditions are met:
The taxpayer or assessee is the owner of the property.
The house property consists of all real estate owned by the said taxpayer.
The house property is not used for business or professional purposes. If the property is used for these purposes, it will fall under ‘Income from Business and Profession’.
Note that ‘house property’ mentioned here can be anything such as a building, flat, shop, office, among others, as well as any land attached to these properties.
Types of house properties are divided among the following categories for the purposes of calculating income tax:
Self-occupied house property refers to a building/flat that is occupied by the tax-payer as their own residence. A self-occupied house property can also be used by the taxpayer’s family; i.e. their spouse, kids or parents. During a given financial year, a taxpayer can only claim two house properties under the category of ‘self-occupied house property’. Any other property apart from these two will be considered as ‘deemed to be let out’ house properties.
Let-out property refers to any property owned by the taxpayer which has been rented out to generate income. Rental income from this property will be taxable under ‘Income from House Property’.
Any house property owned by the taxpayer apart from the two self-occupied house properties will be termed as ‘deemed to be let-out’ properties. Even if the property has not been let out for rent, it will receive the same tax treatment as a ‘let-out property’.
The following will give you a clear idea about the computation of income from house property:
The gross annual value of a house refers to the total rent that can be collected from the house property as per the reasonable rent set by the local municipality. GAV is only applicable on ‘let-out’ and ‘deemed to be let out properties’ as the GAV of a residential property is nil.
Once you have determined the GAV, subtract the property tax paid for the year. This will give you the Net Annual Value of the house property.
30% subtraction of the NAV is allowed under Section 24 of the Income Tax Act, 1961.
Section 24 of the Income Tax Act, 1962 also allows for the deduction of interest paid on home loans for the property from the NAV.
Once you have deducted the 30% of the NAV and interest paid on home loans for the property, you will arrive at the final figure for income from house property.
Note that this ‘Final Income from House Property’ will be taxed at the same tax rate applicable for your income slab.
The following tax deductions will be applicable to the different types of house properties:
A tax deduction of up to ₹2,00,000 is allowed under Section 24 of the Income Tax Act, 1962 for interest paid on home loans for self-occupied properties. However, this deduction will be limited to ₹30,000 if:
The construction of the property is not completed within 5 years from the end of the financial year in which the loan was taken.
The loan was taken before April 1, 1999.
A loan is taken after April 1, 1999, for repair or renovation of the house property.
The total interest paid or payable during a given financial year for these properties will be allowed for deduction. Deductions on the Gross/Net Annual Value of these house properties are also applicable as mentioned in the section above.
Note that deductions on an ‘under construction property’ can be done in 5 equal installments as pre-construction interest paid on the home loan.
A taxpayer can also claim a deduction against interest paid on a home loan as per Section 80EE of the Income Tax Act, 1961. However, the taxpayer will need to keep the following conditions in mind:
A deduction of up to ₹50,000 can be claimed in a given financial year.
If the taxpayer has claimed deduction under Section 80EE, they cannot claim a deduction against interest on home loans under any other section.
The taxpayer must not own any other property at the time of taking a home loan for the house property.
The house property in question must only be used for residential purposes.
The loan must be sanctioned between April 1, 2016, to March 31, 2017.
The value of the house property must not exceed ₹50 lakh and the loan amount must not exceed ₹35 lakh.
You can get a tax deduction of up to ₹2,00,000 on interest paid against a home loan for a self-occupied property. However, this may be limited to ₹30,000 under certain circumstances.
You can calculate the Net Annual Value of house property by subtracting the property tax paid during a given financial year from the Gross Annual Value. The GAV of a house refers to the total rent that can be collected from the house property as per the reasonable rent set by the local municipality.
You can claim a deduction of up to ₹50,000 in a given financial year against the interest paid for home loans.
Any income you generate from your let-out properties after deduction will be taxed according to the tax rate applicable for your income slab.
Deemed to be let-out property refers to a house property that a taxpayer owns which is separate from his/her two-self occupied properties. For tax purposes, the house income tax calculated for this property will be similar to a let-out property, meaning, the taxpayer will have to pay income tax based on the Net Annual Value (NAV) aside from deductions.