Guide: Income from House Property and Taxes

Author
By Hiral Vakil on March 11, 2020

Index

What is House Property?

  • House Property consists of any building and land attached to that building. The land may be in the form of a courtyard or compound or parking, as part of the building.
  • House Property includes flats, shops, office space, factory sheds & farmhouses.
  • An open plot of land is not considered as House Property.
  • Further, House Property includes residential houses, godowns, cinema building, workshop building, hotel building, etc.

Any income generated from the House Property as mentioned above is called Income from House Property. This income shall be taxable only if the following conditions are fulfilled:

  • The assessee must be the owner of the property.
  • The property must be used for any purpose other than for carrying out Business or Profession. If the property is used for own business or profession, then the income from the same shall be taxed under the head ‘Income from Business and Profession’.
  • Income from House Property will be taxed under the hands of the legal owner of the property. The owner for this purpose means a person who can exercise the rights of the owner on his own and not on someone else’s behalf.

What is a Self Occupied House Property?

A Self Occupied House Property is the one which you use as your own residence. This property may also be used by your children, spouse and/or parents. Even if your House Property is vacant, it will be considered as your Self Occupied property.

For the purpose of Income Tax, if more than one Self Occupied properties are owned by a person, than only one of them will be taken as Self Occupied. The remaining House Property will be considered as Let Out. So the property will be taken as rented property even if it is not given on rent. Of course, you have the option to select which property you want to take as Self Occupied.

For example, Ayush owns a primary residence on which he has taken a home loan. He has paid Rs. 1,20,000 interest for the most recent financial year. Let’s look at taxable income from self-occupied house property in Ayush’s situation

Net Annual Value = Gross Annual Value – Interest on Home Loan

What is a Let Out House Property?

For the purpose of Income Tax, if a House Property is given on rent for the whole year or a part of the year than it is considered as Let Out House Property.

For example, Ayush has rented out a property, with an annual rent of Rs. 1,80,000. Ayush has paid Rs. 15,000 in municipal taxes and has also taken out a home loan, and paid Rs. 1,20,000 interest for the most recent financial year. Let’s look at taxable income from let out house property in Ayush’s situation

Net Annual Value (NAV) = Gross Annual Value – Municipal Taxes

Taxable Income = NAV – (NAV * Standard Deduction) – Interest

Benefits on Home Loan

Tax benefits for Home Loan are available as under:

1. Deduction for Home Loan Interest (Section-24):

Current Regime

  • Owner of the House Property can claim a deduction of up to Rs. 2 Lakhs (Rs. 1,50,000 in case you are e-filing for FY 2013-14) if the property is Self Occupied as explained above.
  • In case of a Let Out House Property, entire Home Loan interest will be allowed as a deduction.
  • The deduction will be restricted to Rs. 30,000 if any of the following conditions are not satisfied.
    • The loan must have been taken on or after 1st April 1999.
    • The Home Loan must have been taken for the purpose of purchase or construction of a new property.
    • Acquisition or construction must be completed within 5 years from the end of the financial year in which loan was taken.

What if the loan is taken for reconstruction/ renewal/ repairs?

In case the loan is taken for the repairs or reconstruction of the property, then the deduction for interest will be allowed up to a maximum of Rs. 30,000.

What if the loan is taken before the construction of the property is completed? Can I still claim the deduction?

Yes, you can, but only after the construction is completed. The period from taking loan until the completion of construction is called pre-construction period. So interest paid during this period can be claimed as a deduction in five equal instalments starting from the year in which the construction of the property is completed.

New regime

No claim of home loan Interest on Self Occupied House Property: Individuals who have taken a home loan on their self-occupied property and are paying interest on it, can not claim that interest deduction under Section 24(b).

For example, Ayush used to claim Rs. 90,000 as a deduction under 24(b) for interest on the home loan. Now if he goes for the new income tax regime he will not get this deduction of Rs. 90,000.

A claim of home loan Interest on Rental House Property: Under the new income tax regime, individuals can claim interest on home loan for let out property only up to the amount of their rental income.

For example, Ayush is getting a rental income of Rs. 80,000 from his let-out property. Therefore, his claim on interest on the home loan cannot exceed his rental income that is Rs. 80,000.

2. Deduction for principal repayment (Section-80C):

Current regime

  • Deduction for principal repayment of Home Loan is available up to a maximum of Rs. 1,50,000 subject to the overall limit Section-80C. Following conditions have to be satisfied to claim this deduction:
    • The Home Loan must have been taken for the purpose of purchase or construction of a new property.
    • You must not sell the property within five years of taking possession. If you do so, the deductions for repayment which are already taken will be added back to your income in the year of sale.
  • Stamp duty, registration charges and other expenses directly related to the transfer of the property are also allowed as a deduction under section-80C subject to a maximum limit of Rs. 1,50,000. The deduction for this payment will be allowed in the year in which they are paid.

New regime

Deductions for principal repayment under section 80C are not available for taxpayers following the new income tax regime.

3. Deduction for first-time Homebuyers:

Section 80EE

Current Regime

  • Financial budget 2013-14 introduced section-80EE under which first Home Loan from a bank or housing finance corporation up to Rs. 25 lakh will be entitled to an additional deduction of interest up to Rs. 1 lakh.
  • Following conditions have to be fulfilled to claim this deduction:
    • The loan must have been sanctioned between 1st April 2013 to 31st March 2014.
    • The Home Loan amount does not exceed Rs. 25 Lakhs
    • The value of House Property does not exceed Rs. 40 Lakhs.
    • The assessee does not own any other residential House Property on the date of sanction of the loan.
  • The benefit of this deduction is spread over FY 2013-14 and FY 2014-15. If you are unable to utilise the total limit of Rs. 1,00,000 in FY 2013-14, then the balance amount can be claimed as a deduction in FY 2014-15.
  • It is not necessary that the residential House Property has to be Self Occupied to claim this deduction.

Certain important points to be kept in mind while claiming a deduction for Home Loan:

  • You must be the owner of the property to claim the deductions
  • The Home Loan must also be in your name.
  • The same principal applies to the co-owners as well. So the co-owners can also claim the deduction provided
    • They must be registered co-owners of the property &
    • They must also be co-borrowers for the loan.

I am given HRA by my employer, can I also claim deduction for my Home Loan?

Yes you can. The benefits of HRA and deduction for Home Loan can be availed simultaneously.

If you are living in a rental house & your own house is occupied by your spouse, children and/or your parents, you can claim:

  • HRA for the rent you pay to the landlord &
  • Deduction for Home Loan interest up to maximum of Rs. 2,00,000.

If you are living in a rental house & your own house is also given on rent, you can claim:

  • HRA for the rent you pay to the landlord &
  • Deduction for Home Loan interest without any limit.

New Regime

Deduction under section 80EE is not available for taxpayers following the new income tax regime.

Section 80EEA

Current Regime

Through u/s 80EEA the Income Tax Department has extended the deductible amount from Rs. 50,000 to Rs. 1,50,000 for first time home buyers. Only individuals can claim this deduction until they repay their home loan.

For example, Ayush is buying a home for the first time. He can either claim deduction under 80EE or 80EEA. FM in budget 2020 has laid out a vision of “Affordable housing” for which section 80EEA was introduced which can help people like Ayush to get a higher deduction up to Rs. 150,000 against Rs. 50,000 as per the current regime.

New Regime

Deduction under section 80EEA is not available for taxpayers following the new income tax regime.

4. The setting off losses from house property

Current regime

As per the current income tax regime, losses made from house property can be set off against any other income head i.e business and profession or salary income etc. Moreover, losses can also be carried forward to another FY.

New Regime

As per the new income tax regime, losses from house property can only be set off against other income from house property. Moreover, losses from income from house property cannot be carried forward in the new income tax regime.

For example, Ayush has an annual salary of 700,000. He had Rs. 200,000 loss from house property. His loss from house property can be set off against his salary income as per the current regime. But in the new regime. His loss cannot be set off against any other head except for Income from house property.

How to determine Income from House Property?

The annual value of the property will be charged in the hands of the owner of the property under the head ‘Income from House Property’. The income from property which is used for the purpose of carrying business or profession shall not be taxed under the head ‘Income from House Property’.

Let’s understand the calculations with the help of an example:

Rahul owns a home in Baroda. Calculate income from House Property under both the scenarios i.e Letout & Self occupied if

  • Rent received Rs. 40,000 per month (in case of let out scenario).
  • Property taxes paid Rs. 30,000.
  • Interest on Home Loan Rs, 2,35,000.
ParticularsLetoutSelf occupied
Gross Annual Value (GAV)4,80,000NIL
Less: Property Taxes paid30,000NIL
Net Annual Value (NAV)4,50,000NIL
Less: 30% Standard deduction on NAV1,35,000NIL
Less: Interest payable on Home Loan2,35,000(2,00,000)*
Income/(loss) from House Property80,000(2,00,000)**

* In case of self-occupied property, the deduction for interest on Home Loan is restricted to the maximum of Rs. 2,00,000. Whereas in case of let out property, you can claim the entire amount of interest as a deduction.

** This loss can be set off against income from other heads.

Note: Rental income from subletting is not taxed as income from House Property since in that case person receiving the rent income from subletting is not the owner of the property. Subletting income will be charged under the head ‘Income from other sources’.

FAQs

1. How to calculate self-occupied house property income?

​A Self Occupied House Property is the one which you use as your own residence. This property may also be used by your children, spouse and/or parents. Since there is no Income from such House Property, the gross annual value of this property is NIL (zero).

​Since the gross annual value in case of Self Occupied House Property is zero, claiming a deduction for Home Loan interest will result in a Loss from House Property. This loss can be adjusted against income from other heads.

2. What is Tax Treatment of arrears of Rent?

​The amount received on account of arrears of rent (not charged to tax earlier) will be charged to tax after deducting 30% standard deduction. It is charged to tax in the year in which it is received. These arrears will be taxable in the hands of the recipient even if he is no longer the owner of the property.

3. What is Pre-Construction Period?

​Pre-construction period is the period commencing from the date of borrowing of loan and ends on earlier of the following:

  • Date of repayment of the loan
  • 31st March immediately prior to the date of completion of the construction/acquisition of the property.

Interest pertaining to pre-construction period is allowed as a deduction in five equal annual instalments, commencing from the year in which the house property is acquired or constructed.