How is Income from House Property taxed?

What is House Property?

As per Income Tax Act, House Property is any building owned by the taxpayer himself. This house property may be Flats, Shops, Office Space, Factory Sheds, Commercial Building, Agricultural, Farm Houses etc. 

When does Income from House Property becomes taxable?

Any income in the form of rent from house property is taxable. Even if the house property is not registered in the name of taxpayer, rental income from the house property is treated as taxpayer’s income because he/she is the owner of the house property.

What are the categories in which house property can be divided?

There are mainly 3 categories in which house property can be divided, they are-

1. Self-occupied house property;
2. Let out property;
3. Deemed to be let out property.

1. Self-occupied house property- It is the property, which is used by assessee or his family for their own residence. According to Income-tax Act, if assessee owns more than 1 self-occupied property, then he/she can claim only one of them as Self occupied property.

 The taxpayer will have to choose any beneficial property as his/her self-occupied property. If the owner himself is residing in it, then the question about receivable rent does not arise. Therefore, there is no income from self-occupied house property, but the interest paid on housing loan can be claimed as deduction.

1. Let out property- It is the property which has been let out by an assessee for monetary consideration, that is, rent. The rent received for any house property is considered as ‘Income from house property’.
2. Deemed to be let out- Any property that is vacant is considered as ‘Deemed to be let out’. If the taxpayer is having more than one self-occupied house property then any one property can be claimed as self-occupied house property and other house properties will be considered as “Deemed to be let out”. The rent received from such property is considered as income from the house property and it is fixed according to the area in which the property is located.

How the income from house property computed?

Income from house property can be calculated by using following steps:-

Step I

Fair market value or municipal value that is the value of the property decided by the Municipal corporation of the area, whichever is higher.

Step II

Amount calculated above or Actual rent that can be received from the house property, whichever is higher.

Step III

Gross Annual Value (GAV) - 

If the house property was vacant for any part of the year, the rental income not received by taxpayer due to such vacancy shall be deducted from amount calculated in the above-mentioned step. That’s how the taxpayer will get Gross Annual Value of the property.

GAV= Amount computed in the above step minus Vacancy Loss.

 In case of self-occupied house property, where there is no rental income received by taxpayer, in such a case the Gross annual value of a self-occupied house property will be zero.

Step IV

Net Annual Value (NAV) -

Net Annual Value of house property can be calculated as follows: -

Gross Annual Value of the house property minus municipal taxes paid during the year by the owner.

Things to remember-

1. Municipal taxes paid by tenant will not be accepted.
2. If the owner fails to pay some municipal taxes in a financial year, then he/she cannot claim any deduction for that Financial year.
3. The taxpayer cannot claim any deduction for municipal taxes paid for self-occupied house property.
4. Gross Annual Value of a Self-occupied house property is zero, and therefore the taxpayer cannot claim any deduction for municipal taxes and hence Net Annual value of the house property is also zero.

Step V

 Eligible Deductions

There are 2 deductions which are eligible to be deducted from Net Annual Value of the house property and they are: -

1. Standard Deduction of 30% of NAV.
2. Interest on home loan.

Step VI

 Income from house property= Net Annual Value - eligible deduction.

What are the allowed deduction on the income from house property?

Rent received by taxpayer is considered as taxable income under IT Act. However, Income Tax Act, 1961 has provided some deductions under Section 24 which can be claimed by the taxpayer for the income from house property.

There are 2 deductions, that can be claimed from Net Annual Value of house property and they are:

1. Standard Deduction of 30% of NAV.
2. Interest on housing loan.

What is Standard Deduction?

There may be various expenditures made to maintain the house property, these expenses may be for the repairs, maintenance, depreciation, etc. In order to meet these expenses, the Income-tax Act provides a standard deduction of 30% from Net Annual Value of house property. It is assumed that all the expenses, except the interest on housing loan, are covered in this 30% limit and no deduction or expenses in addition to this limit is available to taxpayer even if actual expenses are higher than standard deduction.

This standard deduction is provided to the taxpayer, even if no expenses are incurred by him or all the expenses are incurred by the tenant

1. Interest on housing loan-

If the taxpayer has taken a home loan to buy or construct a house property, then he is required to pay EMI to the bank or any other lender from whom he/she has borrowed the amount. The EMI is basically divided into 2 parts and they are Interest & principal.

A taxpayer can claim deduction on interest part from the income from house property, whereas, deduction of principal amount in case of residential house property can be claimed under section 80C.

* Deduction of interest on home loan depends on the type of house property. Amount that is available for deduction in under each type is as follows: -

1. Self-occupied house property:

If the home loan is taken to buy or construct the house property, then maximum interest of Rs. 2,00,000 can be claimed by taxpayer for a financial year.

On the other hand, if the loan is taken for the purpose of renovation or to repair the property, then maximum interest that can be claimed is Rs. 30,000 for a financial year.

2. Let out or deemed to be let out property:

There is no limit for claiming deduction of interest on home loan for a let out property.

How is pre-construction interest treated?

Pre-construction interest: - The interest that is paid on home loan, when the house property is under construction is called as “Pre-construction Interest”. The deduction which can be claimed for pre-construction interest is provided in 5 equal instalments starting from the year when the construction completed.

How the loss from House Property is considered under taxation?

House property loss is possible under 2 cases that are mentioned below: -

1. Self-occupied house property: - The Gross Annual Value of self-occupied property is always zero. If the taxpayer has taken a home loan against his self-occupied property, then the interest paid for such loan is deducted from his/her Net Annual Value which results in loss from house property.
2. Let out house property: - If the taxpayer has taken a home loan against his let-out property, then he will have to pay interest on housing loan. If the aggregate of standard deduction and interest paid on loan is more than the Net Annual Value of the house property, then the taxpayer will have a loss from let out house property.

How the loss from house property is set-off & carried forward?

This is how the loss from house property is set-off and carried forward: -

1. If taxpayer is the owner of more than one house property, then loss from one house property can be set-off in the incomes of other house properties.
2. If there is no other house property income available to set-off, then the loss from house property can be set-off from any other incomes like salary, business income, capital gains and other sources.
3. If the loss is still there, then the loss can be carried forward to the next year. But, if a loss is carried forward to the next year, then it can be set off from the house property income only. That’s why, Previous year’s house property loss cannot be set-off from any other income.
4. A house property loss can be carried forward till coming 8 financial years only. If loss persists after the end of 8 financial years, then such loss shall be forgone.

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