Income from House Property and Taxes

Important Keyword: Income from House Property, Income Source, Section 80C, Section 80EE.

Income from House Property and Taxes

India has experienced sustained and rapid growth over the past few decades, with aspirations to achieve developed nation status by its 100th year of Independence. In this journey towards progress, income from house property plays a significant role as a major source of passive income for many individuals. Rental income derived from properties, whether it’s a building or land attached to it, is subject to taxation under the head “Income from House Property.”

This taxation framework ensures that income generated from real estate assets contributes to the country’s economic growth and development. By taxing rental income, the government generates revenue to fund essential services and infrastructure projects, furthering the nation’s progress towards its vision of becoming a developed and prosperous society.

What is House Property?

House property encompasses a diverse range of real estate assets, including buildings and the land attached to them. This broad definition encompasses various types of properties, such as apartments, independent houses, shops, offices, warehouses, factories, and any other building or land that generates rental income. It’s important to note that the term “house property” isn’t limited to residential houses; it also includes commercial buildings.

This comprehensive classification highlights the inclusive nature of the term, covering both residential and commercial properties. Whether it’s a cozy home, a bustling office space, or a bustling retail outlet, any structure or land that generates rental income falls under the purview of house property. This wide-ranging definition ensures that all types of real estate assets are appropriately accounted for under the tax framework, reflecting the diverse nature of property ownership and rental income generation in India.

Income from house property is subject to taxation under specific conditions:

1. Ownership: The individual assessed must be the rightful owner of the property to be liable for taxation under the head “Income from House Property.” Ownership entails possessing legal title and the ability to exercise control over the property.
2. Non-Business Use: The property must be utilized for purposes other than conducting a business or profession. If the property is utilized for the owner’s business or profession, the income generated will be taxed under the head “Income from Business and Profession.”
3. Taxation Under Legal Owner: Income from house property will be taxable under the jurisdiction of the legal owner of the property. The legal owner is defined as the individual who holds the rights of ownership independently, without acting on behalf of another party.

Types of House Property under Income Tax

For tax purposes, the Income Tax Act categorizes house property into two types:

1. Self-Occupied House Property:
   • A self-occupied house property is one that is used for the owner’s own residence purposes. It may also be occupied by the owner’s family, relatives, or the owner themselves. If a property remains unoccupied, it is still considered a self-occupied property for income tax purposes.
   • If a taxpayer owns more than one house property, only one is treated as self-occupied for tax purposes, and the rest are assumed to be deemed let out. However, starting from the financial year 2019-2020, two properties can be considered as self-occupied. Taxpayers have the option to choose which property they want to designate as self-occupied.
2. Let-Out House Property:
   • Any house property that is rented out for all or part of the year is considered a let-out property for income tax purposes.

How to Calculate Income From House Property?

Calculation of Income from House Property:

• For a self-occupied property used solely for residence or unoccupied throughout the previous year, its Annual Value is considered Nil, provided no other benefits are derived by the owner from such property.

When a property is let out for the whole or part of the financial year, the Gross Annual Value (GAV) is calculated as the higher of two factors:

a) Expected Rent (ER): This refers to the rent that the property is expected to fetch if it were let out at its full potential. It is determined based on factors such as the market rate for similar properties in the locality, the size and condition of the property, and other relevant market trends.

b) Actual rent received or receivable during the year: This is the rent actually received by the owner from the tenant(s) during the financial year. If the full rent has not been received due to any reason, the amount that is due and receivable is also considered.

The Gross Annual Value (GAV) is determined by taking the higher of these two values, ensuring that the income from the property is accurately assessed for taxation purposes.

In the case of a self-occupied property, the deduction for interest on a home loan is subject to a maximum limit of INR 2,00,000 under section 24 of the Income Tax Act. This means that regardless of the actual interest paid on the home loan, the maximum deduction allowed for interest is capped at INR 2,00,000 for self-occupied properties.

However, in the case of a let-out property, the entire amount of interest paid on the home loan can be claimed as a deduction without any upper limit. This means that the taxpayer can claim the full amount of interest paid on the home loan as a deduction from the rental income generated from the let-out property.

Deduction from House Property Income

Deduction for Home Loan Interest under Section 24

For a self-occupied house property, the owner can claim a deduction of up to INR 2 lakhs (INR 1,50,000 for e-filing FY 2013-14) on home loan interest. However, in the case of a let-out property, the entire interest paid on the home loan is allowed as a deduction.

The deduction for home loan interest is subject to certain conditions. If any of these conditions are not met, the deduction is restricted to INR 30,000. These conditions include:

1. The loan must have been taken on or after 1st April 1999.
2. The home loan must have been taken for the purchase or construction of a new property.
3. The acquisition or construction must be completed within 5 years from the end of the financial year in which the loan was taken.

Additionally, if the loan is taken for repairs or reconstruction of the property, the deduction for interest is limited to a maximum of INR 30,000. Pre-construction period interest paid can be claimed as a deduction in five equal installments starting from the year in which the construction of the property is completed.

Deduction for principal repayment of the home loan under Section 80C is also available, up to a maximum of INR 1,50,000, subject to certain conditions:

1. The loan must be taken for the purchase or construction of a new property.
2. The property must not be sold within five years of taking possession, otherwise, the deductions for repayment collected will be added back to the income in the year of sale.
3. Stamp duty, registration charges, and other transfer-related expenses are also deductible under section 80C, subject to a maximum limit of INR 1,50,000. These deductions are allowed in the year in which they are paid.

Deduction for first time Home buyers under Section 80EE

The first home loan from a bank or housing finance corporation, up to INR 25 lakhs, is eligible for an additional deduction of interest up to INR 1 lakh. To claim this deduction, the following conditions must be fulfilled:

1. The loan sanction must have been between 1st April 2013 to 31st March 2014.
2. The home loan amount does not exceed INR 25 lakhs.
3. The value of the house property does not exceed INR 40 lakhs.
4. The assesses does not own any other residential house property on the date of sanction of the loan.
5. The benefit of the deduction spans over FY 2013-14 and FY 2014-15. If the total limit of INR 1,00,000 is not utilized in FY 2013-14, the balance amount can be claimed as a deduction in FY 2014-15.
6. It is not necessary that the residential house property has to be self-occupied to claim this deduction.

Under Section 80EEA, the deductible amount for first-time homebuyers has been extended from INR 50,000 to INR 1,50,000. Only individuals can claim this deduction until they repay their home loan.

In the new income tax regime, individuals cannot claim home loan interest on self-occupied house property under Section 24(b). However, they can claim interest on home loans for let-out property only up to the amount of their rental income.

Chapter VI deductions, including deductions under 80C, 80EE, and 80EEA, are not available under the new regime.

Income Tax Deductions for Joint Owners

When it comes to co-ownership and co-borrowing scenarios in relation to a self-occupied house property and a home loan, there are specific tax implications:

1. Co-owners and Co-borrowers:
   • If co-owners of a self-occupied house property are also co-borrowers of a home loan, each co-owner/co-borrower can claim a deduction on interest on the loan, up to Rs. 2 lakh each.
   • Additionally, they can claim deductions on principal repayments, stamp duty, and registration charges under Section 80C, with a combined limit of Rs. 1.5 lakh.
   • The allocation of deductions for each benefit will be based on the respective share of ownership in the property.
2. Co-borrowers but not Co-owners:
   • If an individual is a co-borrower of a loan but not a co-owner of the property, they cannot claim interest on the home loan paid.
   • Moreover, they are not eligible for benefits related to principal repayment, stamp duty, etc.
3. Co-owners but not Co-borrowers:
   • If an individual is only a co-owner of the property and not a co-borrower of the loan, they cannot claim interest on the home loan paid.
   • However, each co-owner can still claim deductions on stamp duty and registration charges under Section 80C, with the allocation based on their respective ownership shares in the property.

Setting off losses from house property

Let’s calculate the income from house property for Rahul’s property in Ajmer under both scenarios:

1. Let-Out Property:
   • Rental Income: INR 40,000 * 12 = INR 4,80,000 per annum
   • Gross Annual Value (GAV): INR 4,80,000
   • Less: Municipal Taxes Paid: INR 30,000
   • Net Annual Value (NAV): INR 4,50,000
   • Less: Deduction for Standard 30%: INR 1,35,000 (30% of NAV)
   • Taxable Income from House Property: INR 3,15,000
   • Less: Deduction for Interest on Home Loan: INR 2,35,000
   • Net Taxable Income from House Property: INR 80,000
2. Self-Occupied Property:
   • Since the property is self-occupied, the Gross Annual Value (GAV) is Nil.
   • Therefore, the Net Annual Value (NAV) is also Nil.
   • Deduction for Interest on Home Loan: INR 2,35,000 (up to a maximum of INR 2,00,000 for self-occupied property)
   • Taxable Income from House Property: Nil (As the NAV is Nil for self-occupied property)

So, Rahul’s taxable income from the house property would be INR 80,000 if the property is let-out, and Nil if it is self-occupied.

In summary:

1. Self-Occupied Property:
   • Deduction for Interest on Home Loan: Maximum of INR 2,00,000
   • Loss from House Property can be set off against income from other heads, such as salary or business income.
   • Rental income from subletting is taxed as income from other sources.
2. Let-Out Property:
   • Entire amount of interest on home loan can be claimed as a deduction.
   • Loss from House Property can be set off against income from other heads.
   • Rental income from subletting is not taxed as income from House Property but under the head ‘Income from other sources’.

Documents Required to File ITR for Income from House Property

The House Property Income Documents Checklist is as follows:

• PAN
• Aadhaar
• Utility Bill
• Rent Agreement
• Form 16A
• Home loan repayment certificate/ Interest Certificate from the bank
• Municipal Tax Receipts

I receive HRA from my employer, can I also claim a deduction for my Home Loan?

Certainly! You can benefit from both HRA (House Rent Allowance) and deduction for Home Loan simultaneously under certain circumstances.

1. Living in a Rental House with Family in Owned House:
   • You can claim HRA for the rent paid for the rental house.
   • Additionally, you can avail deduction for Home Loan interest on your owned house, up to a maximum of INR 2,00,000.
2. Living in a Rental House and Renting out Owned House:
   • You can claim HRA for the rent paid for the rental house.
   • There’s no limit on the deduction for Home Loan interest on your owned house that you’ve rented out.

Read More: What is Pre-construction Interest?

Web Stories: What is Pre-construction Interest?

Official Income Tax Return filing website: https://incometaxindia.gov.in/