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Income from House Property: Comprehensive Guide to Calculate House Property Income and Taxes
Introduction
Income from house property is one of an individual's overall income, and understanding its taxation is essential for tax planning and compliance. The Income Tax Act categorises income into various heads, one of which is "Income from House Property." This head encompasses income earned from the ownership of a property, particularly from rental income. Whether you own a residential property, a commercial space, or vacant land capable of generating rent, it's crucial to grasp the nuances of calculating income from house property to optimise your tax liability.
Contents :-
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Definition of Income from House Property
Income from house property is the revenue derived from owning a property, typically generated through rent. This includes various types of properties such as residential homes, commercial spaces, and even vacant land that can potentially yield rental income. It is essential to note that all income from such properties, be it residential or commercial, is subject to taxation. However, if a property is used for residential purposes, it falls under the "Income from House Property" category, while properties used for business or professional activities are categorised as "Income from Business or Profession."
However, in the Budget 2023 Update, The government has introduced changes to the calculation of capital gains on the sale of residential properties. Notably, the cost of acquiring a house property will no longer include any home loan interest previously claimed as an income tax deduction by the seller during the holding period. This change can have significant implications for taxpayers planning to sell residential properties in the future.
Taxability under Income from House property
To be taxable under the head Income from House property, Conditions must meet the following conditions :
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Ownership: The taxpayer must be the owner of the property to be considered for taxation under this head.
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Property Type: The property can consist of buildings and land, whether a residential house, a factory building, a shop, or an office.
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Usage: The property should be used for purposes other than the taxpayer's business or profession.
However, Rental income from vacant land is taxed under Income from Other Sources.
Categories of Properties for Income Tax Purposes
The Income Tax Act recognises different types of house properties for tax purposes, which include:
Self-Occupied Property:
A self-occupied property is one that an individual uses for their own residential purposes. If an individual owns only one self-occupied property, it is treated as such, and notional rental income is not taxable. Deductions on home loan interest can be claimed, subject to specific limits.
Let-Out Property:
A let-out property is one that is rented or leased to another party. Rental income from such a property is taxable under the head "Income from House Property." Deductions can be claimed for municipal taxes paid, standard deduction (30% of the net annual value), and interest on home loans.
Deemed to be Let-Out Property:
This category applies to properties that are not rented out but are deemed to be let out by tax authorities. It usually includes properties not occupied by the owner due to employment, business, or other reasons. In such cases, notional rental income is considered taxable, and deductions for municipal taxes and interest on home loans can be claimed.
Under Construction Property:
Properties under construction or not yet ready for occupation are also considered for taxation purposes. Income from such properties is not considered until they are completed, at which point they are treated as either self-occupied or let out based on their usage or rental arrangement.
Taxability for various kinds of House Property
Self-Occupied Property: This pertains to a property owned by the taxpayer and primarily utilised for residential purposes, either by the owner or their family. In the context of income tax, an unoccupied property is categorised as self-occupied. Until the Financial Year 2019-20, in situations where a taxpayer possessed multiple house properties, only one was treated as self-occupied, while the others were presumed to be let out. However, starting from the Financial Year 2019-20, two properties can be designated as self-occupied. However, if you own more than two house properties, then even if it is not let out, it will be deemed as let-out property.
Let-Out House Property: Any property that is leased for the entire year or part of it is categorised as a let-out property for income tax purposes
An inherited property received from parents, grandparents, or other ancestors can also fall into either the self-occupied or let-out property category, depending on how it is utilised, as previously explained.
Calculating Income From House Property
To calculate your income from house property, follow these steps:
Determine Gross Annual Value (GAV):
The Gross Annual Value is the potential rental income your property can generate. It's essential to ascertain the GAV correctly. If you have received rent during the year, that amount is your GAV.
In cases where the property is self-occupied, the GAV is considered to be zero.
Deduct Municipal Taxes:
You can deduct the municipal taxes paid during the year from the GAV. This is an allowable deduction, and it reduces your taxable income from house property.
Compute Net Annual Value (NAV):
The Net Annual Value is calculated by subtracting municipal taxes from the GAV. The formula is as follows: NAV = GAV - Municipal Taxes.
Deduct Standard Deduction:
The Income Tax Act allows a standard deduction of 30% of the NAV to account for repair and maintenance expenses. However, this deduction does not apply if you have already claimed the actual expenses incurred for the property.
Deduction for Home Loan Interest:
The interest paid on the home loan during the financial year is eligible for deduction under Section 24 of the Income Tax Act.
Calculate Income From House Property:
Your income from house property is determined by deducting the standard deduction or actual expenses (whichever is applicable) from the NAV. The formula is as follows: Income From House Property = NAV - Standard Deduction or Actual Expenses.
In case of Loss from House Property:
In cases where an individual possesses a self-occupied property financed through a loan and claims deductions on home loan interest, it can lead to a loss due to the Gross Annual Value of the property being nil. This Loss is adjustable against income from other sources.
Particulars | Amount |
|---|---|
Gross Annual Value (GAV) | xxx |
Less-Municipal Taxes(property tax) | xxx |
Net Annual Value | xxx |
Less - Deduction u/s 24
Standard Deduction @30% of Net Annual Value
Interest on home loan: | xxx |
Income from House Property | xxx |
Note: A home loan for under-construction property can get tax deductions up to Rs. 2 lakhs on interest paid in a year and up to 1.5 lakhs for principal paid under Section 80C of the Income Tax Act.
Multiple Self-owned properties
In cases where an individual possesses multiple properties intended for self-occupation, only two of these properties are recognised as self-occupied, with a deemed annual value of nil. The annual value of the remaining properties is determined based on the expected rent if they were to be let out, essentially categorising them as deemed let-out properties.
Computing Expected Rent
Step 1:
Determine the Reasonable Expected Rent of the Property (A)
The Reasonable Expected Rent is the amount for which the property can reasonably be expected to be leased annually. It should be higher of the Municipal Valuation and the Fair Rent value of the property but should not exceed the standard rent established under the Rent Control Act. In essence, Reasonable Expected Rent is calculated as the higher value between the Municipal Valuation and Fair Rent, subject to a maximum Standard Rent.
Step 2:
Calculate the Actual Rent Received or Receivable (B)
Step 3:
The Gross Annual Value is determined by the higher value between (A) and (B).
Defining various terms used in Chapter IV C
Municipal Value: This is the assessed value of the property determined by municipal authorities for the purpose of levying municipal taxes.
Fair Rent Value: Fair rent value represents the reasonable rental amount that can be charged for a property with similar characteristics and in the same vicinity.
Standard Rent: Standard rent is the rental rate established under the Rent Control Act. Property owners are prohibited from charging a rental amount that exceeds the standard rent specified by the Rent Control Act.
How to Calculate Income for Self-Occupied House Property
An assessee can own two houses as self-occupied houses, and more than two houses will be considered as deemed let out.
To understand how income is computed for self-occupied properties, let's take an example:
Abhishek is the owner of a house property with a municipal valuation of INR 4,70,000 and municipal taxes of INR 62,000. Additionally, he has incurred an interest expense of INR 3,58,000 on the home loan. Calculate Abhishek's taxable income from this property.
Solution:
Particulars | Amount (Rs) |
|---|---|
A. Gross Annual Value (for self-occupied properties, GAV is considered NIL) | NIL |
B. Less: Municipal Taxes (For self-occupied, municipal taxes are considered) | NIL |
Net Annual Value (A-B) | NIL |
Less: Interest on home loan As per section 24, interest is restricted to INR 2 lakh) | (2,00,000) |
Income from House Property | (2,00,000) |
Note:
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Where a property is used for business or professional activities and not intended for residential purposes, it will not be taxed under "income from house property." Furthermore, any rental expenses associated with the property will not qualify for deductions under the "Income from Business and Profession."
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Property allocated to employees as residential accommodations is regarded as part of the business assets. However, if any rentals are received from employees for such accommodations, the rental income will be subject to taxation under the "Business and Profession" head.
How to Calculate Income from Let-Out House Property?
Let's discuss a case study on calculating income from deemed let-out properties.
Example for Calculation of Income from Let-Out House Property
Mihir is the owner of a property that has been leased out for the entire year. The property holds a Municipal Valuation of INR 6,53,000, a Fair Rent value of INR 5,56,000, a Standard Rent set at INR 4,66,000, and an actual rental income received totalling INR 4,20,000. Municipal taxes, amounting to INR 10,400, were settled by the tenant. Furthermore, Mihir has incurred an interest expense of INR 2,80,000 on the home loan. Calculate Mihir's net income from this house property.
Particulars | Amount (Rs) |
|---|---|
A. Gross Annual Value Reasonable Rent:
(A) Higher of MV and FR 6,53,000 but Maximum to Standard rent, i.e. 4,66,000
Actual rent received: (B) 4,20,000.
GAV is higher than A and B | 4,66,000 |
B. Less: Municipal Taxes (In case of deemed let out, municipal taxes can only be claimed if paid by the owner and here, the tenant has paid) | NIL |
Net Annual Value (A-B) | 4,66,000 |
Less: Interest on home loan | 2,80,000 |
Income from House property | 1,86,000 |
Exemptions and Deductions
Home Loan Interest Tax Deduction:
Section 24 of the Income Tax Act, 1961, allows taxpayers to claim deductions on the interest paid for a home loan. However, this deduction is capped at Rs. 2 lakhs for self-occupied properties. The interest amount is further categorised into the pre-construction period and post-construction period.
Tax Deduction for Principal Repayment:
Section 80C provides a deduction of up to INR 1,50,000 in a financial year on the principal repayment of a home loan.
Additional Tax Benefit under Section 80EEA:
Section 80EEA offers extra tax advantages to homebuyers with house properties valued up to Rs 45 lakhs. This benefit applies to the interest paid on home loans, up to INR 1.5 lakhs, and is in addition to the deductions available under Section 24.
Income tax deductions on home loans for Joint Owners
A. For Individuals Who Are Neither Co-Owners Nor Co-Borrowers i.e. single owner :
Individual taxpayers can claim a deduction of up to Rs 2 lakh on home loan interest under two circumstances:
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If they self-occupy the house property.
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When the house property remains vacant.
If the property is rented out, the entire home loan interest is eligible for a tax deduction.
Taxpayers can save up to Rs. 1,50,000 within the overall limit under Section 80C while repaying the principal amount of the loan.
To claim this deduction, specific conditions must be met:
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The loan must be used for constructing or purchasing a new house property.
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The property should not be sold within five years from the date of possession.
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Expenses such as stamp duty, registration charges, and related costs can be directly deducted under Section 80C up to a maximum amount of Rs. 1.5 lakh. These deductions can be claimed in the same year the payments are made.
B. For Co-Owners and Co-Borrowers:
In cases where co-owners of a house property are also co-borrowers of a home loan, and the property is self-occupied, each co-owner can claim a deduction on the interest paid on the loan, limited to Rs. 2 lakh (provided the interest on the loan exceeds Rs. 4 lakh).
Each co-owner can also claim deductions on principal repayments, stamp duty, and registration charges under Section 80C, with an overall limit of Rs. 1.5 lakh. The ratio of the deduction for each benefit will be in proportion to their share of ownership in the property.
C. For Co-Borrowers Who Are Not Co-Owners:
If an individual is only a co-borrower on a loan and does not own the property, they are not eligible to claim a deduction on the interest paid on the home loan.
Similarly, if an individual is not a co-owner of the house property, they cannot avail of any benefits related to principal repayment, stamp duty, etc.
D. For Co-Owners Who Are Not Co-Borrowers:
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If an individual is solely a co-owner of the property and not a co-borrower on the loan, they cannot claim a deduction on the interest paid on the home loan.
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Each co-owner can claim deductions for stamp duty and registration charges under Section 80C, with a maximum limit of Rs. 1.5 lakh. The ratio of deductions for each benefit will be based on their respective ownership shares in the property.
E. Additional Tax Deductions for First-Time Homeowners:
First-time homeowners can claim an extra tax benefit of up to Rs. 50,000 on home loan interest under Section 80EE. Please note that this benefit is not applicable to under-construction properties.
Frequently Asked Questions
Q
What does "Income under the head House Property" mean?
A
Income under the head House Property refers to the rental income earned from a property owned by an individual or entity. It is one of the five heads of income in the Indian Income Tax Act.
Q
Who is liable to pay tax on income from house property?
A
The owner of the house property is liable to pay tax on the rental income earned from it.
Q
What constitutes "House Property" for tax purposes?
A
House property includes residential and commercial properties, as well as any land attached to the building.
Q
Is self-occupied property taxable under this head?
A
Self-occupied properties are also considered under this head, but they may be eligible for deductions.
Q
What deductions are available for self-occupied properties?
A
Deductions like the standard deduction (30% of annual value) and interest on a housing loan may be available for self-occupied properties.
Q
How is the "Annual Value" of a property calculated?
A
Annual Value is determined based on factors like the property's location, type, and standard rent in the area. In some cases, the actual rent received may be considered.
Q
What are the deductions for house property income?
A
The standard deduction is 30% of the annual value of the property, and it accounts for expenses like repairs and maintenance. Interest on a housing loan can be claimed as a deduction, subject to certain conditions.
Q
Can I claim a deduction for the principal repayment of a housing loan?
A
No, the principal repayment of a housing loan is not deductible under the income from the house property. Section 80EEA offers extra tax advantages to homebuyers with house properties valued up to Rs 45 lakhs. This benefit applies to the interest paid on home loans, up to INR 1.5 lakhs, and is in addition to the deductions available under Section 24.
Q
How is vacant property taxed?
A
Even if the property is vacant, it is taxable based on its potential rental income, which is calculated as if it were let out.
Q
Is there a deduction for municipal taxes paid on the property?
A
Yes, the municipal taxes paid on the property can be claimed as a deduction by the person who has made the payment (Tennant or owners, as the case may)
Q
What if I have more than one house property?
A
Each house property is treated separately for tax purposes. You can calculate income and deductions for each property individually.
Q
Is rent from a family member taxable under this head?
A
Rental income from a family member is taxable under the head House Property, but the actual rent received should be considered.
Q
Is rental income from a commercial property taxed differently?
A
The principles are similar, but the tax treatment may vary based on the specific circumstances.
Q
Can a co-owner of a property also claim deductions for the same property?
A
Yes, if there are multiple co-owners, they can claim deductions proportionate to their ownership share.
Q
What is the significance of "Deemed Let Out Property" in the context of income from house property, and how is it calculated?
A
Deemed Let Out Property refers to a property owned by an individual that is not actually rented out but is treated as if it were rented for taxation purposes. The calculation is based on the potential rental income the property could generate if it were let out. This potential rental income is determined by factors like the property's location, type, and market rates. Even if the property remains vacant or is used for personal purposes, it is still considered for taxation, and the owner is required to pay tax on this notional income.
Q
Are there any deductions available for expenses related to the maintenance and upkeep of a house property?
A
Yes, there are deductions available for expenses related to the maintenance and upkeep of a house property. The most common deduction is the standard deduction, which allows for 30% of the annual value to be claimed as a deduction to account for expenses like repairs, maintenance, and other general costs. Additionally, interest on a housing loan can also be claimed as a deduction, provided the loan is used for the acquisition or construction of the property.
Q
What is the tax treatment for income from house property when there are multiple co-owners involved, and how are deductions distributed in such cases?
A
When there are multiple co-owners of a property, the income and deductions are typically calculated based on their respective ownership shares. Each co-owner can report their share of the rental income and claim deductions proportionate to their ownership percentage. The share of income and deductions should be divided in accordance with the ownership agreement or deed. This approach ensures that each co-owners tax liability is determined based on their ownership interest in the property.
Prachi Jain
Chartered Accountant
Prachi Jain is a Chartered Accountant with a passion for simplifying finance and tax-related matters through her insightful and informative blogs. With a background in finance and a deep understanding of tax regulations, Prachi has established herself as a trusted source of financial wisdom. Prachi is committed to empowering her readers with the knowledge they need to make informed financial decisions. Her expertise and dedication shine through in every blog post, helping her audience navigate the intricacies of finance and taxes with confidence. Follow Prachi Jain's blog for practical insights and guidance on managing your finances effectively.
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