Table of Contents
- What is income from house property?
- Who is an owner of the property?
- What is self-occupied property?
- How is tax liability of a self-occupied property fixed?
- Tax calculation of self-occupied house property
- How many properties can be declared as self-occupied?
- How to calculate income from a rented property?
- How to calculate gross annual value of a property?
- How to calculate net annual value of a property?
- Income tax deduction on home loan
- How to set off losses from house property?
- How to claim losses if the property is jointly owned?
- How the tax liability of a property held as stock-in-trade calculated?
Did you think you had to worry about financial planning only before you bought the property? No sooner than you get the keys of the property than you realise that this was simply the start of a new cycle of thorough financial planning and sticking with it with utmost dedication. Under the income tax laws in India, your property has the potential to earn a certain income in a year, and you have to pay taxes on this income. The income tax department taxes this income under the head “Income from House Property”. In this article, we would discuss at length what constitutes income from house property, how it is calculated and the deductions you can claim on this income.
What is income from house property?
According to the income tax act, rental income of a property — this could be a building and the land adjoining it — is taxed under Section 24 in the hands of the owner under the head income from house property.
It is important to note here that rennet generated by letting out vacant land is not taxed under this category, but income from other sources. Income from house property is charged only on land which forms part of a building —a parking lot, for instance.
While the law clarifies that rent generated from shops is also taxed under the same head, it would not be taxed under this head in case the property is being used for business or carry out profession services by the owner.
Who is an owner of the property?
In the eyes of the law, the person in whose name the property is registered is the owner, and is liable to pay tax on his earning under income from house property. If the tenant has sub-let the apartment and earns rents by way of doing that, his income would be taxed under the head ‘income from other sources’ or ‘business income’ and not as income from house property. In case an owner transfers his property in the name of his spouse or minor child without receiving adequate compensation, he would continue to be treated as the owner (known as deemed owner in the legal parlance) and pay taxes. Similarly, property owned on lease-hold basis for more than 12 years also makes the holder its owner.
What is self-occupied property?
If the owner uses the property as his residence throughout the year, it would fall under the self-occupied category. This property will fall under the same category if the owner has to live on rent in another city owing to his employment or business and his property either lies vacant for the whole year or occupied by his spouse and children.
How is tax liability of a self-occupied property fixed?
In case of a self-occupied property, you don’t earn any rent, the property’s income-earning capability notwithstanding. Based on that fact, the annual value of such a property is considered “nil”. The owner would in fact suffer loss on his house property because of his loan repayment and property tax payment. The law allows them to set off Rs 2 lakh in a year under various heads under which income is taxed against this loss.
Tax calculation of self-occupied house property
|Gross annual value (GAV)||Nil|
|Deduct from GAV the municipal tax to arrive at the net annual value (NAV)||Nil|
|Standard deduction of 30% on NAV under Section 24(a)||Nil|
|Deduction of up to Rs 2 lakh on home loan interest paid||Rs 2 lakh|
|Loss from house property||Rs 2 lakh|
How many properties can be declared as self-occupied?
The Interim Budget-2019 proposed that an owner can declare any two of his multiple properties as self-occupied. The choice to declare two of his many properties as self-occupied is given to the property holder. This way, a property owner, who has, say, three properties none of which is let out can show any two as self-occupied while filing taxes. However, the owner can claim only Rs 2 lakh as tax deduction under Section 24(b) for both these properties towards interest payment. The same is true of the benefits offered under Section 80C.
How to calculate income from a rented property?
How to calculate gross annual value of a property?
A property’s GAV is determined based on two factors:
- The actual rent: This is the money the landlord actually earns in a year
- The expected rent: The expected rent of a property could be determined in two manners:
Municipal value of the property: Municipal bodies periodically survey buildings under their jurisdiction and assign them an annual value.
Fair value of the property: Fair value is the rent similar properties in an area are expected to generate.
The highest of the three values would be considered the GAV of the property.
Nishant Kumar has rented his property for which he is earning Rs 1.80 lakh annually. While the municipal value of his property is only Rs 1.5 lakh, similar properties in his area earn Rs 2 lakh in rent. The gross value of Kumar’s property would be Rs 2 lakh, considering this is the highest among the three values.
Property’s GAV: Rs 2 lakh
How to calculate net annual value of a property?
Your income from house property is taxed at the net annual value of your property. You arrive at your property’s NAV after deducting property tax. Do note here that this deduction can’t be claimed for unpaid taxes or late payments. This means, deductions on municipal taxes can be claimed on payment basis alone.
From here you have to consider two more deductions to calculate the income which would ultimately be taxed.
*Standard deduction: 30% of NAV under Section 24(a)
Income tax deduction on home loan
The owner can claim various deductions under certain Sections of the income tax law on home loan principal and home loan interest payments.
It is important to note here that unlike municipal taxes, where deductions can be claimed only on payment basis, deductions against home loan interest payment can be claimed on accrual basis.
Section 24 (b)
If the property is not generating income, that is in case it is self-acquired or is vacant property, the borrower can claim deduction of up to Rs 2 lakh in a year on the home loan interest paid in a financial year under Section 24 (b). While an owner can now declare two of his multiple properties as self-occupied, the limit to claim deduction against interest has been capped at Rs 2 lakh only.
This limit would stand reduced to Rs 30,000 only, if:
*You borrowed the loan before April 1, 19991 for purchase and construction.
*You borrowed the loan on April 1, 19991 or after that and used it for repairs, renewal and reconstruction.
*You borrowed the money on April 1, 19991 or after that, but failed to complete the construction work in five years. From three years earlier, this limit was increased to five years in the Union Budget 2016. So, if the loan was taken on April 1, 2019, the house must be completed by March 31, 2025.
In case the property is generating income for the borrower, that is if it is let out, the entire home loan interest component is allowed as deduction.
What happens to the interest paid in pre-construction period?
Deductions on the interest paid by the borrower in the pre-construction period can be claimed in five equal installments starting from the year in which the construction is complete. This means, a borrower who expects his house to be complete by March 2025 can start claiming deductions in 2025 itself.
In the Budget 2016-17, Section 80EE was reintroduced, under which tax deduction of Rs 50,000 is offered to first-time homebuyers against the home loan interest payment, if they meet certain conditions. This exemption is over and above the deductions offered under Section 24 (b).
*The loan should have been sanctioned only by a financial institution between April 1, 2016, and March 31, 2017, for the purchase of a residential property.
*The worth of the property should not exceed Rs 50 lakh and the loan value should not be more than Rs 35 lakh.
*At the time of property registration, the buyer should not hold a property in his name, and he should provide an interest certificate from his bank to claim the benefit.
To boost its housing-for-all-by-20202 scheme, the government in the Interim Budget 2019 introduced Section 80EEa to offer first-time buyers additional tax deduction of Rs 1.50 lakh a year, over and above the exemption offered under Section 24(b). However, a first-time buyer availing of tax benefits under Section 80EE is not eligible to claim deductions under this Section. A borrower has to fulfill certain terms and conditions to claim deductions under Section 80EEA.
*The value of the property should not exceed Rs 45 lakh.
*The unit size should not exceed 60 square metre (sqm) in metro cities 90 sqm in others.
*The loan must be borrowed from a bank.
Section 80C covers deductions on home loan principal repayment under its overall deduction limit of Rs 1.50 lakh a year. Stamp duty and registration charges for property purchase can also be included as deductions under this Section.
Do note here that the buyer must not sell his property to claim this deduction for five years. If that were to happen, the income tax department would deduct the tax from your income it earlier gave.
Example 2: Tax calculation for a rented property
If Kumar pays Rs 2,000 as municipal tax, his property’s NAV will be Rs 1.98 lakh.
Rs 2 lakh -Rs 2,000 =Rs 1.98 lakh
From here Kumar has to claim a 30% standard deduction:
Rs 198,000-Rs 59,400 = Rs 138,600
From this, Kumar has to deduct the interest he pays against home loan of this property
Rs 138,600-Rs 200,000= Rs 61,400
Loss from house property: Rs 61,400
|Property type||GAV||Deduction for property tax||NAV||Standard deduction||Exemption on home loan interest|
|Self-occupied/vacant||Nil||Nil||Nil||Nil||Rs 2 lakh|
|Rented||The rent earned or the expected rent, whichever is higher||The amount paid during the year||The amount after subtracting property tax||30% of NAV||Entire amount paid during the year|
What happens if the property is let-out for some months and lies vacant for some other months?
In this case, the actual rent received would be considered the property’s GAV.
What happens if the property is let-out for some months and is self-occupied for some other months?
In such a scenario, the GAV of the property would be calculated as if the property was let-out for the entire year. The higher of the expected rent or the actual rent would be the GAV of such a property.
How to set off losses from house property?
Since the GAV of self-occupied properties is considered nil, the owner would invariably suffer loss on his house property as he pays municipal taxes and home loan interest. Despite the fact that a let-out property is generating a certain income for the owner, it is quite possible that the income is much less as compared to the liability coming in the form of home loan interest and property tax. So, in both the cases, the taxpayer would suffer monetary loss.
In order to provide relief to such taxpayers, Section 71 of the income tax law prescribes set off of losses from house property under other heads which include income from salary, income from other sources, profit and gains of business and profession and capital gains. The unadjusted losses under other heads could be carried forward for eight years after the year in which the loss occurred. After this eight-year period, the set-off is permitted only under the income from house property head.
However, the amount that could be set-off against other heads has been capped at Rs 2 lakh per year in the Budget for 2017-18 for all sorts of properties, self-occupied or rented.
How to claim losses if the property is jointly owned?
Both owners can claim the above mentioned deductions while filing their income tax in proportion to their share in the property. However, both ought to be co-borrowers also in the home loan to be eligible for these benefits.
While each can claim Rs 2 lakh as tax deduction under Section 24(b), they can claim Rs 1.5 lakh under Section 80C. They can also claim deductions either under Section 80EE or Section 80EEa if they are first-time home buyers.
How the tax liability of a property held as stock-in-trade calculated?
Properties lying unsold with real estate developers are considered stock-in-trade. With effect from assessment year 2018-19, a new sub-section has been inserted in Section 23 of the income tax law, stating that annual value of such a property would considered nil if the property stands vacant throughout a year. While builders could claim nil income on their unsold stock only for a year earlier, the Finance Act, 2019, has now extended this period to two years. From assessment year 2020-21, the annual worth unsold inventory would be considered nil for two years after it receives a completion certificate.
Do note here that income received from stock-in-trade property is taxed as business income.
What is composite rent and how it is taxed?
The rent charged for the premises and the rent charges for services or assets that are part of the premises together constitute composite rent. In case the composite rent can’t be separated, it would be taxed under any other head but income from house property. In case it can be separated, the rent from the property would be taxed as income from house property and the rent for various services will be charged under business income or income from other sources.
How will the tax be calculated if property is rented only for part of a year?
For tax calculation, such a property would be considered let-out for the whole year, but the actual rent will be considered only for the period for which the property earned rent.
How is tax calculated if part of a property is rented while another part is self-occupied?
Both the portions will be treated as independent properties, and the tax will be calculated as self-occupied and let-out properties for the respective portions.
What happens when a tenant sublets a property?
His income is taxed under income from other sources or business income since he is not the owner of the property.
Can a lessee be considered an owner of a property?
A lessee would be the deemed-owner of a property if the lease period exceeds 12 years, and he would be liable to pay taxes on his income from house property.
How is rent earned from a shop taxed?
Under the income tax law, the income generated from renting a building or land is taxed under income from house property head. It also clarified that rent earned from a shop is taxed under the same head. However, if business activities are undertaken from this shop by the owner, his income would be taxed as business income.
If the owner occupied more than one properties, the benefit of self-occupied properties can be claimed with respect to how many properties?
This benefit has been limited to two properties.
Is the 30% standard deduction under Section 24 (a) on house property applicable on self-occupied homes?
This deduction is applicable only on let-out properties and not self-occupied ones.
What is the limit to claim loss on house property?
Loss from house property can be claimed up to Rs 2 lakh in a year, irrespective of the property type.
Can I set off loss from house property against my salary?
Yes, a taxpayer’s loss from house property is adjusted under the head income from salary. If you incur loss on house property at Rs 6 lakh in a year, and you have set off Rs 2 lakh from your salary income. Suppose you earn Rs 10 lakh in salary, your total taxable salary would be Rs 8 lakh only.
How will house property income be taxed in case of joint ownership?
In such a scenario, the incomes of the owners will be taxed based on their share in the property. Each can also claim deductions according to the proportion of their share in the property.
How is income from renting vacant land taxed?
Income from renting vacant land is taxed under income from other sources. Income is taxed under the head income from house property only in case of buildings and the land adjoining that building.