Income from House Property and Taxes

As per Income Tax Act 1961, any income from the immovable assets, such as, building, land or apartment is taxable. Apart from business or any commercial purposes, if such ‘House Properties’ serve as source of income, their income tax falls under the head ‘Income from House Property’. There are House Properties, such as, Factory, Office, Auditorium/Hall, Warehouses, etc. that are used for commercial purposes. Income from such assets is taxable under ‘Income from Business and Profession’. We are going to discuss on the circumstances, where a taxpayer earns under ‘Income from House Property’.  

There are some conditions applicable to consider an income as 'Income from House Property'

• The ‘House Property’ should be of the type Building, Land or Apartment.

• The assessee should be the owner of the ‘House Property’. The Ownership Right can be of Freehold, Leasehold and Deemed type.
• The ‘House Property’ should not be used by the owner for business/professional purposes

Criteria of Taxability of Assets under ‘Income from House Property’

For the purpose of Tax Calculation, assets that are modes of income under ‘Income from House Property’ are divided in these three types:

Self-Occupied

A house property that is used by the taxpayer or his/her family as residence is said to be Self-Occupied. As per the IT Act Rule valid from FY 2019-20 onwards, a taxpayer can declare any 2 House Properties as Self-Occupied and any other House Property(ies) will be considered as ‘Let Out’. Accordingly, a vacant house property can be considered as ‘Self-Occupied’ by the owner.

"In case, the owner of a house property keeps his/her own house vacant and lives on rent for reasonable purpose, such as, occupation, etc., the property will be treated as ‘Self-Occupied’."

Rented 

The house property that is rented (for residential purpose) for the whole of the year or its part is considered to be Let Out and accordingly falls under tax liability.

Inherited 

The house property that is legally transferred from an owner to his/her heir is considered to be Inherited. This type of house property can either be used as ‘Self-Occupied’ or ‘Let Out’.

The following situations of income from house property located outside India are considered for taxpayers based on their residential status:

1. In case, a resident (Individual/Member of HUF, who is a resident or resident but not ordinarily resident), such income is taxable under IT Act India, if the income is brought in India.
2. For non-residents, it is taxable only if the income is received in India.

House Property Tax Calculation

Both ‘Self-Occupied’ and ‘Let Out’ House Properties are considered as taxable under IT Act 1961. Income Tax under ‘Income from House Property’ from these properties is liable on their ‘Net Annual Value (NAV)’.

• If a property is self-occupied, its Gross Annual Value (GAV) is considered to be NIL and is subject to Municipal Tax liability and Deduction u/s 24 (if applicable). Thus, the Net Annual Value of Self-Occupied is either NIL or a loss (in case, loan is availed) for the taxpayer that can be set off with other income.
• If a property is rented, its Gross Annual Value (GAV) is the same as the rent collected for the year. Net Annual Value from such property is computed as:

The last row of the above table gives the taxable income from House Property.

Points to Note Down:

1. Rental value should be equal or more than the reasonable rental amount suggested by municipality of the area.
2. If any individual/HUF lets out his property and lives in a rented house, he/she can claim HRA tax exemption by showing valid proof of its logical reason.
3. If a taxpayer owns only a land with no buildings on it, its annual value is not ‘Income from House Property’.

Deductions Allowed on Income under ‘Income from House Property’

The taxable income under ‘Income from House Property’ has various permitted deductions (other than standard deduction and deduction on municipal tax) that a taxpayer can avail, such as:

Deduction on Home Loan Interest u/s 24(b):

 Any loan taken for the purpose of purchasing, constructing, repairing or renovating any house property can be claimed as deduction. This loan is deductable on accrual basis, i.e. the interest can be computed regardless of when the actual payment is made. So, interest on Home Loan should be calculated separately every year and claimed as per. The deduction amount allowed as per the Act is:

• Maximum of INR 2,00,000/- when the house property if self-occupied or vacant
• Full Interest Amount with no upper limit, when the property is rented/deemed to be rented
• In case of deduction of Pre-Construction Interest
  • Pre-construction deduction is valid up to 5 equal instalments (up to INR 2 lakh) claimed starting from the year when the construction of property is finished. No deduction is allowed for any repair/reconstruction.
  • Up to INR 30,000, if the construction is not completed in 5 years. Or the property is not acquired in 5 years.
  • If the loan is taken for reconstruction/renovation of any house property, deduction is not allow till the work is completed

Deduction on Principal Repayment: 

Up to INR 1.5 lakh can be claimed as deduction over the principal repayment of the Home Loan within overall limit of Section 80C. The deduction is claimed if these conditions are satisfied:

• Loan should be taken for construction/purchase of a new house property
• Stamp duty, registration charges and other expenses associated with the transfer can be claimed as deduction u/s 80C within the maximum deduction amount allowed for Principal Repayment.

Benefit for First-Time home owners: 

Up to INR 50,000 of tax benefit is allowed deduction U/s 80EE on the basis of availed loan, for the homeowners with only one house property on the date of sanction of loan.

Deduction for First-Time home owners: 

Tax benefit is allowed in a new Section 80EEA, for the Housing Loan taken by the taxpayers for affordable housing between April 1, 2019 and March 31, 2020. This benefit is allowed for only to individuals. This deduction is not allowed for any taxpayer. Deduction for interest payment upto maximum of INR 1,50,000/-. This deduction is over and above the deduction of Rs 2,00,000/- for interest payments under Section 24 (b) of the Income Tax Act 1961. (if they meet the conditions of section 80EEA.)

Loan should be sanctioned in the name of the owner of the house property

• Multiple owners can have a share on a house property and each co-owner can claim the deduction against Home Loan Interest and Principal Repayment (inclusive Registration, Stamp Duty and Other Charges directly related to the Transfer) based on his/her ownership share of the property.
• Deduction amount of up to INR 2,00,000/- is allowed for each joint owner over the Home Loan interest payment. Up to INR 1,50,000/- (as per overall limit of Section 80C) is allowed on Principal Repayment for each co-owner.
• Deduction on Home Loan can only be claimed once the construction/renovation of the house property is complete.
• For a salaried employee, the Home Loan Certificate should be submitted to the Employer for the purpose of its entry at the time of TDS deduction of salary. Otherwise, in case the loan information remained undeclared, a taxpayer can claim refund at the time of tax filing.
• A salaried person can avail for permissible HRA along with Home Loan deductions, in case he/she has availed for it. The provision is valid even for those individuals, who are staying on rent in the same location of the house property own by them.
• For self-employed/freelancers, home loan deduction can be adjusted with the Advance Tax payment.
• For Self Occupied Property (SOP) or vacant property, its GAV is treated as ‘nil’. So, any property tax or deduction claimed on loan interest is treated as a loss. This loss can be adjusted with other incomes, such as, salary, business/profession, capital gains, income from other sources, etc. Else, it can be carried forward in the next year to the next year to make it up with the income from house property.
• As per Income Tax Act, two houses can be treated as SOP and both are taxable in Property Tax. So, if an individual is owner of a house, he/she may register the second house in the name of spouse/relative to save the extra tax burden.
• In case of co-ownership, there are more tax benefits based home loan than that availed by a sole owner. Thus, ownership of a house property can be shared by husband-wife, parent-child (children), etc. who are eligible to apply home loan.
• A vacant house is taxed on the fair rental value. So, it can be given on rent to get an income and adjust the tax payment with it.

FAQs

How a taxpayer, who is earning income from salary as well as from house property, can file his/her IT Return?

If an ordinary resident individual is earning an annual income not more than INR 50 lakh from salary and one house property, he/she can make income tax file by ITR-1.

How the income tax is calculated for a taxpayer who is earning rental income from more than one house properties?

Tax liability should be computed for each of the house properties separately.
 

Also, Read: "How to Calculate real Estate Income.

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