Under the Indian Income Tax Act, income from house property can either be profitable or unprofitable. When you declare your income, you have the option to report a loss from house property. If the taxpayer incurs a loss on this income category, they can offset that loss against other income generated in the same financial year.
The house property loss set-off remains unfeasible in a self-occupied property. However, there is a provision to carry it forward up to eight financial years. House property losses are deductible from other sources of income in a fiscal year.
There’s also a high possibility that the assessee might not have any other source of income in that year. In such cases, you can set off such losses in the subsequent assessment years. The following sections of the article will focus on everything you need to know about the loss from house property and its significance in income tax.
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What is loss from house property?
The term “Loss from House Property” describes a situation where the costs of maintaining or owning a property are greater than the rental income generated from it. In the context of income tax, this concept is used to categorize the income or loss related to house property separately from other types of income.
Reasons for incurring loss from house property
Primarily, the owner suffers such losses due to claiming a deduction on interest on borrowed capital. You won’t have any such deductions when you buy or build a house using your money. However, if you use borrowed money for buying or constructing, the maximum deduction is for the interest you pay.
Hence, the two common reasons for loss from house property are:
Loss from self-occupied property
The taxpayer and their family can use self-occupied properties as a residence. If a property is vacant, it also counts as self-occupied. Before FY 2019-20, if you owned more than one self-occupied property, you can consider only one of them as self-occupied, and the remaining were assumed rental. Plus, the taxpayer can choose which property they want to keep as self-occupied.
Now, the government has changed the rules for claiming tax benefits, facilitating the house property loss set off. For FY 2019-20 and onwards, a homeowner can claim two properties as self-occupied and one as let out. This is an excellent opportunity to save money on taxes while still maintaining the same lifestyle.
If you own a property and live in it, the property’s Gross Annual Value (GAV) will be zero. You are not making any money off renting it or paying off your mortgage because you occupy it. Section 24 of the IT Act states that the taxes paid and interest on your home loan will lead to a loss from house property. The maximum deduction allowed for interest on a home loan is Rs 1.5 lakhs.
Loss from a let-out property
The GAV in the case of let-out properties will not be zero. Hence, if the claimed deductions exceed this value, the let-out property would come under house property loss. Similarly, based on its usage, you can choose Inherited properties from parents and grandparents as self-occupied or a let-out.
See also: How to save tax on property sale
How to calculate loss from house property?
- First, you need to determine the GAV of property, which is zero for self-occupied residences. The GAV will be the rent received if the property is for rent.
- Second, you need to subtract taxes levied on the property. Under the IT Act, if you pay property taxes, it is deductible from its GAV.
- Third, you need to compute the Net Annual Value (NAV). The NAV = GAV – Property tax.
- Fourth, you need to reduce 30% of NAV, deductible under standard deductions u/s 24. It excludes other expenditures like maintenance and re-painting houses as tax relief beyond the 30% limit.
- Fifth, you need to subtract interest paid on the home loan during the year you availed, also deductible under Section 24.
- Lastly, the value you get is your income or loss from house property, taxable at an applicable slab rate. Since the GAV on the self-occupied property is nil, you will incur a loss while claiming the deduction on home loan interest. However, the IT Act offers house property loss set-off against income from other heads.
See also: Section 80GG
How to treat loss from house property for taxation?
If you have a loss from your house property but make money in any of the other five types of income: salary/house property/business or profession/capital gains/other sources, you can use it for house property loss set-off.
Finance Act 2017 introduced an amendment for such losses, applicable from 2018-19 onwards. The loss from house property that a taxpayer can set off against Income from Other Heads limits Rs 2 lakhs for each financial year. You can carry forward the remaining loss amount to the next fiscal year to set off.
However, it is essential to remember that house property loss set-off is possible with any other income head in the same fiscal year. However, if you carry forward it to the following year, you can set off the loss only against income from House Property for that tax year.
Moreover, the taxpayer cannot carry the balance loss forward for the next eight years. If there is income in house property in any of the years, the taxpayer will have to set off the upset in that year itself.
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Deductions on home loans
If you live in your house, you can claim up to Rs 2 lakhs in tax benefits on your home loan interest. If the house is empty, you can reap the same benefits. You can deduct all of your loan interest if you rent the property out. Under certain conditions, the limit for interest deduction is up to Rs 30,000:
- You obtained a home loan on or after 1st April 1999, and the purchase or construction of property remained unfinished until five years after the end of the same financial year. The five-year duration starts from the last day of the assessment year.
Earlier, in the FY 2026-17, the period was three years which expanded to five years in Budget 2016. A taxpayer should also note that they can claim interest deduction only at the beginning of the assessment year when the construction comes to completion.
- You applied for the loan before 1st April 1999.
- You availed the loan on or after 1st April 1999 for renovation or renewal.
See also: All about home loan tax benefits in 2022
Claiming a tax deduction on loan availed before completing its construction for house property loss set off:
The taxpayer cannot claim the deduction on the interest on loan until the property reaches its fruition. The said period is the pre-construction period. The taxpayer can claim interest paid on a loan over five separate tax instalments during this time. It begins with the year the house finishes its construction.
Deduction on principal repayment
You can deduct up to Rs 1,50,000 from the overall limit of Section 80C. It is only available if you have received a home loan to purchase or construct a new house property. Moreover, you cannot resell the property within five years of taking possession of it. If you do, the deduction will be added back to your income.
Fees related to transfer allowed as deductions for loss from house property
Stamp duty and registration charges are just two of the many fees you can claim as a deduction under Section 80C. Other allowable expenses include interest on loans or mortgages, transfer taxes, and commission fees. You can claim these as deductions this year, but the total amount cannot exceed Rs 1.5 lakh.
Deductions under Section 80EE and 80EEA
The Income Tax Act added a new section with 80EE. Under Section 80EE, the tax benefit will provide homeowners with one property on the sanctioned date of their loan with up to Rs 50,000 in deductions.
In the instances where you have more than one property, the IT Act introduced Section 80 EEA to enable taxpayers to get deductions for interest on the loan. The taxpayer should have availed such a loan between 1st April 2019 and 31st March 2020. However, the taxpayer cannot combine such benefits with the deductions under 80EE.
See also: All about Section 80EEA
Tax deductions for homebuyers: Things to remember
Here are some key points to keep in mind regarding tax deductions for homebuyers:
Interest deduction during construction
Interest on a home loan cannot be claimed as a deduction while the property is still under construction. You can only claim this deduction once the construction is complete. The period between borrowing the funds and beginning construction is known as the pre-construction period. The interest paid during this time can be claimed as a tax deduction, but it must be spread out in five equal installments starting from the year the construction is completed.
Deductions for self-occupied property
If the property is self-occupied, each co-owner who is also a co-applicant on the loan can claim a maximum deduction of Rs 2,00,000 on their Income Tax Return for the interest paid on the home loan. The total interest paid is allocated among the co-owners based on their ownership share. However, the total amount claimed by all co-owners combined cannot exceed the actual interest paid on the loan.
Time limit for interest deduction
If the construction of the property is not completed within five years, the deduction for home loan interest is capped at Rs 30,000. The five-year period is counted from the end of the financial year in which the loan was taken. For example, if the loan was taken on April 30, 2015, the property must be completed by March 31, 2021. (Before FY 2016-17, the completion period was three years, but this was extended to five years in the Budget 2016.) Keep in mind that the interest deduction is only applicable starting from the financial year when the construction is completed.
Housing.com POV
Understanding the concept of loss from house property is crucial for homeowners, especially those who have taken home loans. The Indian Income Tax Act provides various provisions and deductions related to house property, allowing taxpayers to offset losses against other income sources, carry forward losses for future years, and claim tax benefits on home loan interest. By carefully navigating these rules, homeowners can optimize their tax liability and make informed financial decisions. Whether dealing with self-occupied or let-out properties, being aware of the tax implications can significantly impact one’s overall financial health.
FAQs
What is 'house property'?
The IT Act uses the income head 'House Property' to explain a taxpayer's income from the immovable properties they own.
What is my income from house property if my family or I reside in it?
If you or your family lives in it for the entire year and don't use it for any other purpose, it is a self-occupied property whose GAV is nil, hence, no income.
Can I carry forward the loss from house property?
Indian taxation laws allow the taxpayer to carry forward the house property losses up to eight assessment years.
If I have multiple let-out properties, should I calculate their income individually or club them all?
In the case of multiple rental properties, the taxpayer has to calculate the house property income for each property separately.
Is the income received from subletting house property taxable under house property income?
No, only the rent received by the owner is taxable under 'Income from house property'. So, sublet properties will fall under income from 'other sources'.
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