Important keyword: Income from House Property, Income Heads, Section 80EE.
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Income from Let out House Property
Owning a home has long been a cherished aspiration for the Indian middle class. As homeownership becomes a reality for many, it’s crucial to grasp the tax implications associated with different types of House Property Income. Under the Income Tax Act, House Property Income falls into three main categories:
Self-occupied House / Permanent Residency: This category includes properties that are used as the primary residence of the owner. If you live in the property you own, it falls under this classification. The tax treatment for self-occupied houses differs from that of rented properties.
Let out House / Rented Property: Properties that are rented out to tenants fall into this category. Any income generated from renting out such properties is considered Let Out House Property Income. The rental income earned is taxable under the head “Income from House Property.”
Deemed Let out House Property/ Vacant House: Properties that are neither self-occupied nor rented out are classified as Deemed Let Out House Property or Vacant Houses. Even if these properties remain unoccupied, they are deemed to be let out for tax purposes. This means that not deriving any income from a property does not exempt it from taxation.
How to Calculate Let Out House Property Income?
Rental Income: This refers to the total rent received by the property owner during the financial year.
Municipal Taxes: If you’ve paid any Municipal Taxes for your property, you can claim a deduction for the same under Section 23 of the Income Tax Act.
Standard Deduction: Homeowners incur various expenses for maintaining and preserving their property. However, these expenses cannot be directly deducted from rental income. To address this, homeowners can avail of a 30% standard deduction on the Net Annual Value under Section 23.
Home Loan Interest Payment: Interest paid on a home loan is considered an allowable expenditure when calculating income from house property. For self-occupied properties, a deduction of up to Rs. 2,00,000 is permitted. However, the deduction is limited to the amount of rent received if the property is let out. Also, any loss exceeding Rs. 2,00,000 cannot be set off against other incomes.
Home Loan Principal Repayment as Deduction: Under Section 80C of the Income Tax Act, individuals can claim a deduction for home loan principal repayment of up to Rs. 1,50,000.
Additional Deduction u/s 80EE: First-time home buyers can avail of an additional deduction of Rs. 50,000 under Section 80EE. This is in addition to the deductions available under Section 24(b) and Section 80C.
Benefit of Co-ownership of Property
Absolutely, joint ownership of a property, known as co-ownership, offers tax advantages for all co-owners. When multiple individuals own a property together, the income generated from that property is taxable in the hands of each co-owner according to their ownership share. This means that the tax burden is distributed among the co-owners based on their respective ownership percentages.
Co-ownership not only allows individuals to share the financial responsibilities and benefits of owning a property but also provides an opportunity to optimize tax liabilities. By spreading the tax liability across multiple individuals, co-ownership can result in significant tax savings for each co-owner. This makes it a favorable option for many people looking to invest in property while also managing their tax obligations efficiently.
Income Tax Deductions for Joint Owners
When it comes to co-ownership and co-borrowing of a home loan, the tax implications vary depending on the roles of each individual involved:
Co-owners and Co-borrowers:
If co-owners of a self-occupied property are also co-borrowers of a home loan, each co-owner can claim a deduction on the interest paid 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 an overall limit of Rs. 1.5 lakh. The deduction amount for each benefit is determined based on the share of ownership in the property.
Co-borrowers without Co-ownership:
If an individual is a co-borrower of a home loan but not a co-owner of the property, they cannot claim deductions on the interest paid on the home loan.
Furthermore, they are not eligible for any benefits related to principal repayment, stamp duty, etc.
Co-owners without Co-borrowing:
If an individual is only a co-owner of a property and not a co-borrower of the loan, they cannot claim deductions on the interest paid on the home loan.
However, each co-owner can claim deductions on stamp duty and registration charges under Section 80C, with an overall limit of Rs. 1.5 lakh. The deduction amount is divided based on the respective ownership shares in the property.
In summary, the tax benefits available to co-owners and co-borrowers are contingent upon their roles in the ownership and financing of the property, with each scenario offering different deduction opportunities under the Income Tax Act.
Important keyword: Income from House Property, Income Heads.
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Income from Deemed Let-Out House Property
Under the Income Tax Act, if an assesses owns more than one house property, they have the option to declare two of them as self-occupied for tax purposes. However, any additional properties beyond these two must be compulsorily declared as rented out, even if they are not actually rented. These additional properties are treated as deemed let out properties, also known as vacant properties.
For deemed let-out properties, the assesses is required to calculate the rental income based on the fair market value of the property. This rental income is then subject to taxation as per the applicable slab rates. It’s essential to note that even if the property is vacant and not generating any actual rental income, the assesses is still liable to pay tax on the deemed rental income from these properties.
For deemed let-out properties, the calculation of income follows a similar process as for properties that are actually let out. However, there is a difference in the deduction available under section 24(b) of the Income Tax Act.
Under section 24(b), the deduction for interest on home loan is limited to Rs. 2 lakhs for deemed let-out properties, which is the same as for self-occupied properties. This means that even if the property is deemed let-out and not actually generating rental income, the owner can still claim a deduction of up to Rs. 2 lakhs for interest paid on a home loan.
What is the difference between Self Occupied & Let Out?
Self-Occupied
Let Out
A Self Occupied House Property is the one that you use as your own residence, your spouse, children and/or parents.
Let Out is when you give a house property for rent for during the financial year either for the whole or a part of the year.
Starting from the Assessment Year (AY) 2020-21, taxpayers in India have the option to declare up to two house properties as self-occupied for the purpose of income tax calculation. This means that if an individual owns more than two properties, they must consider the remaining properties as deemed let-out properties, even if they are not actually rented out.
For example, if an individual owns three properties:
They can declare two of these properties as self-occupied.
The third property will be considered as a deemed let-out property, even if it is not generating any rental income.
This provision allows individuals to optimize their tax liabilities by treating certain properties as self-occupied, thereby maximizing the available deductions and minimizing the tax burden.
How to Determine Taxable Income from Deemed Let Out House Property?
Income from a Deemed Let Out Property is calculated through a series of steps to determine the Gross Annual Value (GAV), Net Annual Value (NAV), and allowable deductions:
Calculate Gross Annual Value (GAV):
GAV of a Deemed Let Out Property is determined based on the least of the following factors:
Fair Rent Value (FRV), which is assessed using the Annual Rent Value of similar properties in the locality.
Assessed Value, determined according to the Municipal Tax Value of the property.
Standard Rent, established as per Rent Act regulations.
Deduct Municipal Taxes Paid:
Municipal taxes, also known as property taxes, are deductible from the GAV. The full amount of municipal taxes paid is allowed as a deduction, effectively reducing the Net Annual Value of the property. However, this deduction is only permitted if the taxes are paid by the property owner.
Calculate Net Annual Value (NAV):
NAV is derived by subtracting the municipal taxes paid from the Gross Annual Value (GAV). This computation results in the Net Annual Value of the Deemed Let Out Property.
Claim Standard Deduction of 30%:
A standard deduction of 30% is applied to the NAV. This deduction represents expenses related to the maintenance and upkeep of the property.
Deduct Interest Paid on Home Loan u/s 24(b):
Interest paid on a home loan, as per Section 24(b) of the Income Tax Act, can be deducted from the NAV. This deduction provides relief for the interest expense incurred by the property owner.
Particulars
Self Occupied
Let Out
Deemed Let Out
Gross Annual Value (Generally, total rent received)
NIL
XXX
XXX
Less: Municipal Taxes Paid
Not Applicable
XX
XX
Net Annual Value
NIL
XXX
XXX
Less: Deduction u/s 24 1. Standard Deduction at 30% 2. Interest on Housing Loan
Important Keyword: Income from House Property, Income Heads, Income Tax, ITR-2.
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What is Pre-construction Interest?
During the pre-construction period, which spans from the approval of the home loan until the completion of the construction of the house property, interest deduction is not permitted as the property is still under construction. However, the interest paid during this pre-construction period, known as Pre-construction Interest, is eligible for deduction. This deduction is allowed in five equal installments starting from the year in which the construction of the property is completed. This provision allows taxpayers to spread out the benefit of interest deduction over multiple years, easing the financial burden associated with constructing the property.
How to calculate Pre-construction Interest?
To calculate the pre-construction period of a constructed house property, we need to determine the period from the year the home loan was taken until the year in which construction is completed. However, for interest deduction purposes, the interest will be allowed from the date of the loan taken until the 31st of March before the financial year in which construction is completed.
Let’s illustrate with an example:
Suppose the home loan was taken in the financial year 2018-2019 (FY 2018-19), and the construction of the property was completed in the financial year 2021-2022 (FY 2021-22).
Pre-construction period:
From FY 2018-19 (year of loan taken) to FY 2020-21 (the year before completion).
This spans three financial years.
Interest paid during the pre-construction period:
Obtain the annual home loan certificate issued by the bank for each financial year.
Add up the interest paid for the pre-construction period from FY 2018-19 to FY 2020-21.
Divide the total pre-construction interest into 5 equal installments:
Once the total pre-construction interest is determined, divide it into five equal parts.
Claiming deduction:
Claim the deduction of pre-construction interest from the financial year of completion of construction (FY 2021-22).
This deduction can be claimed while filing the Income Tax Return (ITR) on the Income Tax e-Filing portal under the head “Income from House Property.”
Example
Kunal has taken a loan for the construction of house property in Pune. Here are the loan details:
Loan amount
Rs. 30,00,000
Loan taken in
November 2017
EMI
Rs. 25,000
Construction completed in
December 2019
To calculate the tax deduction Kunal can claim for the home loan while filing his return for the Financial Year (FY) 2019-20, we need to consider the pre-construction interest and the interest paid during the FY 2019-20.
Pre-construction interest:
Calculate the total pre-construction interest paid by Kunal from the year the home loan was taken until the completion of construction. Let’s assume this total pre-construction interest is INR X.
Interest paid during FY 2019-20:
Obtain the annual home loan certificate issued by the bank for FY 2019-20.
Determine the total interest paid by Kunal during FY 2019-20. Let’s assume this total interest paid during FY 2019-20 is INR Y.
Total deductible interest for FY 2019-20:
Add the pre-construction interest (INR X) and the interest paid during FY 2019-20 (INR Y) to get the total deductible interest for FY 2019-20.
Claiming the deduction:
Kunal can claim this total deductible interest as a deduction while filing his return for FY 2019-20 under the head “Income from House Property.”
Calculation of EMI payments for FY 2019-20
In the financial year 2019-20, Kunal paid a total of Rs. 3,00,000 as EMIs, out of which Rs. 1,35,000 went towards principal repayment, making him eligible for a deduction under Section 80C of the Income Tax Act. This deduction reduces his taxable income by Rs. 1,35,000.
Considering the property is rented out, Kunal can claim the entire interest amount of Rs. 1,65,000 as a deduction under Section 24(b) while filing his Income Tax Return (ITR) for the financial year 2019-20. This deduction helps reduce his taxable rental income, thereby lowering his overall tax liability.
let’s calculate the amount paid for pre-construction interest:
The pre-construction interest is allowed to be claimed in five equal installments starting from the year in which the construction is completed. In this case, since the construction was completed in December 2019, we need to calculate the pre-construction interest for the period from November 2017 to March 2019, which spans 17 months.
By determining the total pre-construction interest paid during this period and dividing it into five equal installments, Kunal can accurately calculate the amount of pre-construction interest to be claimed as a deduction in each financial year following the completion of construction.
Financial year
Period
EMI calculation
2017-18
November 2017 to March 2018
Rs. 25,000 x 5 = Rs. 1,25,000
2018-19
April 2018 to March 2019
Rs. 25,000 x 12 = Rs. 3,00,000
Total
= Rs. 4,25,000
Out of the total EMI payments amounting to Rs. 4,25,000, Rs. 1,91,250 is allocated towards principal repayment. This leaves Rs. 2,33,750 (Rs. 4,25,000 – Rs. 1,91,250) as the pre-construction interest, which is eligible to be claimed in five equal installments of Rs. 46,750 each, starting from the financial year 2019-20.
Therefore, Kunal will be able to claim a deduction of Rs. 1,65,000 (the interest paid during the financial year 2019-20) plus Rs. 46,750 (the first installment of pre-construction interest) totaling Rs. 2,11,750 as deduction towards home loan interest for the financial year 2019-20.
Important Keyword: Capital Gains Exemption, Income Heads, Income Tax, Section 54.
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Section 54: Capital Gain Exemption on Sale of House Property
When individuals decide to sell their residential property, they often do so for reasons like job changes, lifestyle adjustments, or retirement. While this transaction incurs capital gains tax, the primary motive isn’t usually profit-making but rather finding a more suitable home. Recognizing this, the Income Tax department offers Capital Gain Exemption under Section 54 of the Income Tax Act.
This provision allows taxpayers to reduce their Capital Gain Tax by fulfilling certain conditions. By meeting these criteria, individuals can claim exemptions on the sale of residential properties, providing them with financial relief during transitions in their lives.
Capital Gain Exemption under Section 54
Exemption provided under Section 54 of the Income Tax Act offers relief on capital gains arising from the sale of one residential house property when the proceeds are invested in the purchase or construction of another residential house property. The exemption amount is determined as the lower of:
The cost of the new residential house property.
The capital gains realized from the sale of the residential house property.
To be eligible for capital gain exemption under Section 54, taxpayers must meet the following criteria:
The taxpayer must be an Individual (including NRI) or HUF; this benefit is not applicable to companies, LLPs, or firms.
The asset sold must be a Long Term Capital Asset, specifically a residential house (including building or lands appurtenant to it).
Income generated from the house should be chargeable under the head “Income from House Property.”
If the capital gains amount exceeds ₹2 crore, the taxpayer must purchase or construct one residential house in India within specific timeframes.
If the capital gains amount is not more than ₹2 crore, the individual or HUF has the option to either purchase two residential houses or construct two residential houses within prescribed time limits.
These provisions aim to facilitate homeownership and encourage investment in residential properties, contributing to the broader goal of promoting housing for all.
Quantum of Exemption under Section 54
The amount of exemption under Section 54F is determined based on specific criteria:
If the cost of the new residential house is greater than or equal to the Long-term Capital Gain:
The entire Long-term capital gain is exempt.
If the cost of the new residential house is less than the Long-term Capital Gain:
Long-term Capital Gain to the extent of the cost of the new residential house is exempt.
Note: In Budget 2023, Finance Minister Nirmala Sitharaman capped capital gain tax exemption at ₹10 crores on the sale of the first residential property under section 54, effective from 1st April 2023.
Example: Jayni sold a house property in FY 2023-24 for ₹40 crores, purchased in FY 2016-17 for ₹20 crores. She bought a new house property worth ₹18 crores in another city. Jayni’s deduction under section 54 is as follows:
Particulars
Amount(₹)
Sales Consideration
40,00,00,000
Less: Purchase Price Index Cost of Acquisition (20,00,00,000*348/264)
(26,36,36,364)
Long-Term Capital Gains
13,63,63,636
New House Property Purchase Price
18,00,00,000
Section 54 Exemption Amount
10,00,00,000
In this scenario, Jayni can claim an exemption of up to ₹10 crores since the house property was sold after April 1, 2023. However, taxes will be levied at a rate of 20% on the remaining amount exceeding ₹10 crores, which is ₹3,63,63,636.
Consequences of Transfer of New House Property
The lock-in period of 3 years is applicable when a taxpayer claims an exemption under Section 54 of the Income Tax Act. Different scenarios can unfold:
Situation 1: If the taxpayer sells the new residential house within 3 years from the date of purchase or construction, and the cost of the new house purchased is less than the Capital Gains:
Consequences: The exemption under Section 54 is revoked. The entire sales value of the new house property becomes taxable as capital gains. In this case, the cost of acquisition is considered as NIL.
Situation 2: If the taxpayer sells the new residential house within 3 years from the date of purchase or construction, and the cost of the new house purchased is more than the Capital Gains:
Consequences: The exemption under Section 54 is withdrawn. However, the taxpayer can still claim the cost of acquisition (Total Purchase Price – Exemption u/s 54) while calculating capital gains.
Situation 3: If the taxpayer sells the new residential house after 3 years from the date of purchase or construction:
Consequences: The exemption under Section 54 remains intact. The taxpayer can claim the index cost of acquisition while calculating the capital gain on the sale of the house property. However, income tax on capital gains must be paid at the rate of 20%.
CGAS Scheme for claiming exemption.
If a taxpayer finds themselves unable to utilize the entirety or a portion of the sales consideration for purchasing or constructing a new property by the due date of submitting their Income Tax Return (ITR), they have the option to deposit the funds in the Capital Gains Deposit Account Scheme (CGAS). By doing so, they can still claim an exemption for the amount already expended on the construction or purchase of the property, in addition to the amount deposited in CGAS.
However, it’s crucial to bear in mind that if the taxpayer fails to utilize the amount deposited in the Capital Gains Account Scheme within the stipulated time frame of 3 years, it will be treated as taxable income for the last year.
Important Keyword: Capital Gains Exemption, Income Heads, Income Tax, Section 54B.
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Section 54B of Income Tax Act: Capital Gains Exemption on Sale of Agricultural Land
Section 54B of the Income Tax Act provides a significant relief to farmers who sell agricultural land with the intention of acquiring another. This provision acknowledges that the primary motive behind such transactions is not profit-making but rather the acquisition of a more suitable piece of land for agricultural purposes.
By granting a Capital Gain Exemption under this section, farmers are relieved from the burden of paying income tax on the capital gains realized from the sale of one agricultural land when the proceeds are reinvested in another agricultural land. This exemption serves to alleviate the financial strain that would otherwise be imposed on farmers, recognizing the unique nature of their transactions and the essential role they play in agricultural activities.
Who can Claim an Exemption Under Section 54B of the Income Tax Act?
To qualify for exemption under section 54B of the Income Tax Act, taxpayers must satisfy the following conditions:
Individual or HUF Status: The taxpayer seeking exemption must be either an individual or a Hindu Undivided Family (HUF). This benefit is not extended to companies, Limited Liability Partnerships (LLPs), or firms.
Sale of Agricultural Land: The land sold must qualify as a Long Term Capital Asset if sold after 24 months of ownership or a Short Term Capital Asset if sold within 24 months.
Use for Agricultural Purposes: The agricultural land sold must have been utilized for agricultural purposes by the taxpayer, their parent, or HUF for at least two years preceding the sale.
Purchase of New Agricultural Land: The taxpayer must utilize the proceeds from the sale of the old agricultural land to purchase new agricultural land within two years from the date of sale.
Location of New Agricultural Land: The newly acquired agricultural land must be situated within the territory of India.
Meeting all these conditions enables taxpayers to claim exemption under section 54B, providing them with a vital financial reprieve and encouraging continuity in agricultural activities.
To claim the Capital Gains Exemption under Section 54B, taxpayers must adhere to specific steps while filing their Income Tax Returns (ITR) for the respective financial year.
What is the Amount of Exemption available Under Section 54B of the Income Tax Act?
To calculate the deduction under Section 54B, Palak must determine the least of the following amounts:
Cost of New Agricultural Land: The value of the new agricultural land acquired by Palak, which is INR 45,00,000.
Capital Gains on the Sale of Agricultural Land: The capital gains realized from the sale of the agricultural land, which is the selling price minus the purchase price. In this case, the capital gains would be INR 60,00,000 (selling price) minus INR 30,00,000 (purchase price), resulting in a total of INR 30,00,000.
Since the cost of the new agricultural land (INR 45,00,000) is less than the capital gains on the sale of the agricultural land (INR 30,00,000), Palak’s deduction under Section 54B would be INR 30,00,000.
Particulars
Amount (INR)
Sales Consideration
60,00,000
Less: Indexed Cost of Acquisition (30,00,000*348/264)
39,54,545
Long Term Capital Gains
20,45,455
New Agricultural Land Purchase price
45,00,000
Section 54B Exemption amount
20,45,455
What Happens to Exemption in the case of sale of Agricultural Land?
In scenarios related to the lock-in period under Section 54B of the Income Tax Act, different consequences arise based on the timing and circumstances of the sale of the new agricultural land:
Situation 1: Sale Within 3 Years with New Asset Cost Less Than Capital Gains
If the taxpayer sells the new agricultural land within 3 years from the date of purchase and the cost of the new asset purchased is less than the capital gains:
Consequences: The exemption under Section 54B is revoked, and the total sales value of the agricultural land becomes taxable as capital gains. The cost of acquisition for the new asset will be considered as zero.
Situation 2: Sale Within 3 Years with New Asset Cost More Than Capital Gains
If the taxpayer sells the new agricultural land within 3 years from the date of purchase and the cost of the new asset is more than the capital gains:
Consequences: The exemption under Section 54B is revoked. However, the taxpayer can still claim the cost of acquisition (Total Purchase Price – Exemption u/s 54B) while calculating capital gains.
Situation 3: Sale After 3 Years
If the taxpayer sells the new agricultural land after 3 years from the date of purchase or construction:
Consequences: The exemption under Section 54B remains intact. The taxpayer can claim the index cost of acquisition while calculating Long Term Capital Gains on the agricultural land sold.
What is the Capital Gains Account Scheme (CGAS)?
When a taxpayer faces challenges in utilizing the entire or a portion of the sales consideration for purchasing new agricultural property before the due date for submitting the Income Tax Return (ITR), they have the option to deposit the funds into the Capital Gains Deposit Account Scheme (CGAS). By doing so, the taxpayer can still claim exemption on the amount already spent on purchasing land, in addition to the funds deposited in the CGAS.
However, it’s crucial to understand that if the taxpayer fails to utilize the amount deposited in the Capital Gains Account Scheme within the prescribed time limit of 3 years, it will be treated as taxable income of the last year. Therefore, taxpayers should carefully manage their funds and ensure timely utilization to avoid any adverse tax implications.
