Section 24 of Income Tax Act : Deduction on House Property

Section 24 of the Income Tax Act deals with interest that an individual pays on home or property loans. The government recognizes that housing is one of the most important needs therefore, they have come up with several key benefits under section 24(B) of the Income Tax Act, 1961 to grant relief by way of various tax breaks to reduce your tax outgo. The deductions available are interest on loan and standard deduction.

Income from House Property

There are three possible scenarios wherein income from house property can occur:

  • Income by way of rent on a let out property
  • The annual value of the property which is considered “deemed to be let out” for income tax purposes (When we own more than one property);
  • The annual value of the property which is self-occupied;

Income from House Property shall be taxable only under the following conditions:

  • The assessee must be the owner of the property.
  • The property should 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 taxable 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.

Section 24 of Income Tax Act – Deductions under House Property

There are 2 types of tax deductions under Section 24 of the Income Tax Act to reduce your tax outgo if you have income from house property:

Standard Deduction

  • Standard Deduction is 30% applicable on the Net Annual Value of the property.
  • This 30% deduction is allowed even when your actual expenditure on the property is higher or lower.
  • Therefore, this deduction is irrespective of the actual expenditure you may have incurred on insurance, repairs, electricity, water supply, etc.
  • For a self-occupied house property, since the Annual Value is Nil, the standard deduction is also zero on such a property.

Interest on Home Loan

If the taxpayer has borrowed a housing loan to purchase or to construct a house property, then EMI consists of 2 parts namely Interest & principal. Deduction of interest part can be claimed from the income of house property whereas deduction of the principal amount in case of residential house property can be claimed under Section 80C.

If the owner or his family are self-occupying the house property, they can claim up to INR 2 lakh on the interest of their home loan. The same treatment applies when the house is vacant. However, if you have rented out the property, the entire interest on the home loan is allowed as a deduction. However, there are certain criteria mentioned below that you must meet else the deduction on interest will be limited to INR 30,000:-

  • The home loan must be for the purchase and construction of a property;
  • The loan must be taken on or after 1st April 1999;
  • The purchase or construction must be completed within 5 years from the end of the financial year in which the loan was taken
  • There is an interest certificate available for the interest payable on the loan
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Pre Construction Interest

The interest paid on a housing loan when the house property is under construction is known as “Pre-construction Interest”. There is also a benefit of pre-construction interest that arises when you take a home loan for purchasing or construction.

Key points to remember before claiming this interest:-

  1. This cannot be claimed for a loan taken for repairs or reconstruction of the house;
  2. The amount of pre-construction, as well as interest on a housing loan that can be claimed for a particular year, cannot exceed Rs 2 lakhs in any case.
  3. The deduction of such pre-construction interest is allowed in 5 equal installments starting from the year when construction completes.

For example: If the construction of a house gets completed on 15th October 2019 (FY 2019-20), then we are eligible to claim deduction accruing to 1/5th of the interest paid till 31st March 2019 while filing our tax returns for the FY 2019-20.

How to determine Income from House Property?

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

Ansh is repaying a home loan. The total amount paid in a particular year amounts to INR 6 lakhs of which INR 2.5 lakhs is the interest component. The person has also incurred a pre-construction interest of INR 2 lakhs. He is earning INR 80000 annually from a let out property and also pays municipal taxes of INR 5000 for the property. Let us now calculate the Income from House Property under both the scenarios:-

  1. He has a self-occupied property, or
  2. The property is rented out
Type of Property Self Occupied Let Out
Gross annual Value (Rent paid- 7000*12) NIL 80,000
Less: Municipal Taxes or Taxes paid to local authorities NA 5,000
Net Annual Value(NAV) Nil 75,000
Less: Standard Deduction(30% of NAV) NA 22,500
Less: Interest on Housing Loan 2,50,000 2,50,000
Less: Pre-construction interest (1/5th of 2 Lakhs) 40,000 40,000
House Property Income (2,90,000) (2,37,500)
Overall loss restricted to (200,000)** (2,37,500)*

*Maximum loss set-off allowed in a financial year is limited to Rs 2 lakh. The remaining loss from a can be carried forward to future years 8 years in total. However, in these 8 years, it can only be set off from house property income.

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

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FAQ

Is rental income from sub-letting chargeable to tax under the head “Income from house property”?

Rental income in the hands of the owner is charged to tax under the head “Income from house property”. Such income is taxable under the head “Income from other sources” or profits and gains from business or profession, as the case may be.​

Can interest paid on loans taken from friends and relatives be claimed as a deduction while calculating house property income?

Yes, if the loan is taken for purchase, construction, repair, renewal, or reconstruction of the house. However, if the loan is taken for personal or other purposes then the interest on such loan cannot be claimed as a deduction.​

How does section 24 work?

Section 24 of the income tax act calculates the tax exemptions on the basis of property income, on the following basis:
– If a person rents his or her property, then the rent will be considered as part of his earned income.
– Secondly, if a person owns more than one house, then the net value asset of the house is considered as part of the income. However, the house one is living in is not counted under this.
– If a person owns only a single house, then the net value asset of the house is considered Nil.

Taxability of Composite Rent, Unrealised Rent, and Arrears of Rent

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. Any income generated from such House Property shall be taxable under the head Income from House Property. It will be taxable under the hands of the legal owner of the property. This article covers the treatment of composite rent, arrears of rent, and tax treatment when unrealized rent is subsequently realized. Considering Section 22 of the Income Tax Act, the following are the conditions to satisfy to tax any income under the head “Income from house property”:

  • There should be a property consisting of a building or land appurtenant thereto.
  • The assessee should own the property
  • The property should not be used by the owner of the property for the purpose of his business or profession, the profit of which is chargeable to income-tax

Composite Rent

Meaning of composite rent

Rent received for a house as well as for facilities provided with the house like lift, gas, water, electricity, etc. the total amount so received is called ‘composite rent‘. Where the assessee receives composite rent from its tenant towards the building as well as services/amenities, such rent should be split up.
Example: Provision of fully furnished house on rent having furniture and AC

Taxability of composite rent

  • The only portion of rent attributable to the house is taxable as “Income from House Property”
  • The portion attributable to facilities is taxable as Income from Other Sources.
  • When composite rent consists of rent for building and rent for other assets (Like furniture) and the two rents are:
    • Inseparable: Then such income is taxable as business income or income from other sources
    • Separable: Then the rent of building is taxable as Income from house property and rent of other assets is taxable as Income from other sources.
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Unrealised Rent

Meaning of unrealised rent

  • It is the rent of the property pertaining to the previous year, which the owner of the property could not recover from the tenant. It is subsequently realized from a tenant
  • To be able to deduct unrealized rent from your rental income, there are four conditions:
    • The tenancy is bonafide
    • The defaulting tenant has vacated or steps have been taken to compel him to vacate the property
    • The defaulting tenant is not in occupation of any other property of the assessee and
    • The assessee has taken all the reasonable steps to institute legal proceedings for the recovery of the unpaid rent or satisfies the assessing officer that legal proceedings would be useless.
  • Unrealized rent will not be allowed as a deduction from your actual rent received or receivable if the conditions are not falling under the above-mentioned four conditions.

Taxability of unrealised rent

  • It shall be deemed to be the “Income from House Property” in respect of the financial year in which such rent is received or realized
  • Amount to the extent it has not been included in the annual value earlier will be charged to tax. Further, 30% of such rent shall be allowed as a deduction
  • It will be taxable even if the house is not owned by you in the year of recovery/receipt of unrealized rent

Arrears of Rent

Any amount received as arrears of rent, not charged to income-tax for any PY (earlier years), then amounts so received after allowing deduction of 30% of such amount, will be taxable under the head “Income from House Property”. Further, arrears of rent shall be chargeable to tax in the previous year in which it is received. Whether the property is owned by the assessee in the year of receipt or not.

Computation of Income From a Let out Property

Manner of computation of income from house property in case of a Let-out property :

Gross annual value (*)   XXXX
Less.- Municipal taxes paid during the year   XXXX
Net Annual Value (NAV)   XXXX
Less.- Deduction under section 24    
Deduction under section 24(a) @ 30% of NAV XXX  
Interest on borrowed capital under section 24(b) XXX XXXX
Income from house property   XXXX

(*) Gross annual value is determined in following three steps:

  1. Compute reasonable expected rent of the property (Note 1).
  2. Calculate the actual rent of the property (Note 2).
  3. Compute gross annual value (Note 3).

Rent pertaining to the vacancy period is to be deducted from the amount derived at step 3

Note 1: Reasonable expected rent will be higher of the following :

  1. Municipal value of the property; or
  2. Fair rent of the property.

In the case of a property covered under the Rent Control Act, reasonable expected rent will be higher of the municipal value or fair rent subject to the standard rent of the property.

Note 2: It is the actual annual rent of is let-out property during the previous year. While computing actual rent, rent pertaining to the vacancy period or unrealized rent is not to be deducted.

Note 3: Gross annual value will be higher of the amount computed at step 1 or step 2 above.

FAQ

Can rental income on a property be taxed in the hands of a person who is not a registered owner of the property?

The income or receipt can be taxed as ‘Income from House Property’ only when you own the property and you are entitled to legally receive income from such property.

How do I compute income from a property which is self-occupied for part of the year and let out for part of the year?

Such a property will be treated as been let-out throughout the year and income will be computed accordingly. However, while computing the taxable income in case of such a property, actual rent will be considered only for the let-out period.

How is standard rent calculated?

Standard rent means the rent which is calculated and prescribed by competent authority.

What if fair value of a property cannot be determined?

Fair value means market value of the property. So if the fair value is not available or cannot be ascertained, fair market value of  similar property in the same location shall be taken as the fair value of the property in question.

Property Tax – Definition, Types and Calculations

In India, Property tax is levied by the Municipal authorities on the real estate. This tax is based on the area, construction, size and value of the property etc. This article will help you understand various aspects related to Property Tax in India.

What is a Property Tax?

The term Property with regards to taxation refers to all tangible real estate owned by an individual and consists of a house, office building and premises rented to third parties. Property tax is an amount that is annually paid by the land/property owner to the local government or the municipal corporation. The amount that is collected in the form of this tax is used for maintenance and upkeep of public properties like roads, sewage system, parks, government buildings etc.

What are the Types of Property?

Properties in India are broadly classifies into 4 main categories:

Land: This is the most common kind of property owned by the citizens of our country. It is to be noted that land here means the core land without any construction or improvement.

Improvements made to the land: This is the second kind of category which includes improvements made to the land such as constructing a building or godown.

Personal property: This includes movable properties such as cars, buses, cranes or trucks.

Intangible property: Intangible property comprises the ownership of assets such as patents, trademarks, and royalty.

How is Property Tax Calculated?

Property tax in India is calculated keeping in mind various factors. The method used to calculate this may vary from one municipal corporation to another but the overall computation will remain the same.

Firstly, an assessment of the property is carried out by determining the area it is in, different amenities provided, the status of occupancy, type of property (residential, commercial or land), year and type of construction (multi-storied/ single floor/ pukka or kutcha structure, etc.), floor space index and carpeted square area of the property.

After determining all these parameters, the government body uses one of the following methods to determine the property tax:

Annual Rental Value System or Rateable Value System (RVS)

Tax under this method is calculated on the yearly rental value of the property. This value must not necessarily be the actual rent collect from the property. The valuation of the rent is decided by the municipal authorities keeping in mind factors such as size, condition of the premises, location, amenities etc. Hyderabad and Chennai are two big cities whose municipal corporations follow this method.

Capital Value System (CVS)

Under the Capital Value System tax is calculated as a percentage of the market value of the property. The market value of the property is determined by the government and is based location of the property. This market value is published and revised yearly. Mumbai’s municipal corporation follows this method.

Unit Area Value System (UAS)

As per this method, tax is calculated on the per-unit price of the built-up area of the property. This per-unit price is based on the property’s location, land price and usage. This value is then multiplied with the built-up area to calculate the final tax value. Municipal authorities such as Kolkata, Delhi, Bengaluru, Patna and Hyderabad use this method.

How to pay Property Tax Online?

  1. Go to the official website of Municipal Corporation

    Visit the official website of the concerned municipal corporation

  2. Select Online Service and go to ‘Pay Property Tax’

    Choose the option ‘Pay Property Tax’ and move to the payments option.

  3. Fill out the right form

    Fill out the right property tax form, i.e. form 4 or 5, based on property type and the respective category.

  4. Enter the correct assessment year

    While filling the form, choose the correct assessment year, i.e. the year for which the tax is to be calculated and paid.

  5. Enter the Property Identification Number

    Now, enter the property identification number, property documents and other required information such as the owner name.

  6. Choose the mode of payment

    After entering all the relevant information, choose the mode of payment.

  7. Print the challan for refrence

    After successful payment, a challan is generated on the screen. Take the print out of the generated challan for future references.

How to Calculate Income from House Property?

Following points must be kept in mind while calculating Income from house property:

  • While calculating Income from House Property, the net annual value of the residential property should be considered. This net annual value is calculated by subtracting municipal taxes from the gross annual value of the house.
  • If the house is lying vacant for any time in a financial year, one has to consider the rent that is received for the time the house was occupied and not for 12 months.
  • Furthermore, if in case the house is lying vacant and yet the owner is paying property tax, then he/she can offset this loss against income from others during the same fiscal. If an individual is unable to offset the loss in the same year, they can also carry forward this loss for up to 8 years.

Income Tax Deductions on Income from House Property

One can avail a tax deduction on the income from house property under sections 24 and 80C.

Section 24 is called ‘ Deduction from Income from House Property ‘ and under the following scenarios the amount earned will be considered as income from house property:

  • The rent amount that you receive on renting the house is considered as your income
  • If one owns more than one house, the net annual value of unoccupied house property is considered as your income
  • If an individual owns only one house and occupies it himself, then the income from house property will be considered as Nil

The two types of deductions that are available under section 24 of the Income Tax Act:

Standard Deduction:

Under standard deduction, the sum equivalent to 30% of the net annual value does not fall under the tax limit.

Interest on Loan

  • If the loan is taken for purchase, construction or renovation of a house then the interest amount that is to be repaid is exempted from taxation.
  • Additionally, if this loan is taken for a self-occupied house property then one can claim an exemption up to INR 2,00,000
  • If the loan is taken for the purpose of purchasing or construction a property even before actually purchasing or finishing the constructions. One can claim a deduction on the interest paid before the construction or purchase is completed. This can be done in 5 equal instalments, from the year in which the house is bought or the construction is completed.
  • If this loan is taken for the purpose of renovation or reconstruction of a house then one cannot claim exemption till the renovation/reconstruction is complete.

Deductions Under Section 80C

As per section 80C, individuals can claim a deduction of up to INR 1.5 lakhs on stamp duty and registration charges while purchasing a new house. Individuals can also claim a deduction for any other expense incurred during the process of transfer of property. 

FAQs

I am a tenant, am I suppose to pay Property Tax?

No, in India, the house owner is liable to pay the tax on the property.

How many times a year does one have to pay Property Tax?

Property Tax is annually paid by the owner of the property to the municipal authorities.

How to file ITR for Rental Income?

If you own a house or earn rental income, it should be reported as Income from House Property in the Income Tax Return (ITR). The taxpayer must calculate the income and pay tax on rental income at slab rates. The taxpayer should report the following types of income under the head ‘Income from House Property‘:

  • Rent Income from house property
  • Vacant house property
  • Housing loan on a property
  • Jointly owned house property

Calculation of Rental Income

  Particulars Self Occupied Property Let Out Property
  Gross Annual Value (GAV) NIL xxxx
Less: Municipal Tax Paid NIL (xxxx)
  Net Annual Value (NAV) NIL xxxx
Less: Standard Deduction u/s 24 @ 30% of NAV max
2,00,000
No Limit
Less: Interest on Borrowed Capital u/s 24 (without any ceiling limit) xxxx (xxxx)
  • The standard deduction u/s 24 of 30% of NAV is allowed irrespective of actual expenditure incurred on insurance, repairs, water supply, etc.
  • The taxpayer can claim a maximum loss of INR 2,00,000 under the head Income from House Property during a financial year.
  • Pre-Construction Interest i.e. the interest paid in the pre-construction period will be allowed as a deduction in five successive financial years starting from the year in which construction was complete.

Co-ownership of House Property

  • Co-owned Self-Occupied House Property
    The annual value (NAV) of the property for each co-owner will be NIL and each co-owner can claim the deduction of up to INR 2,00,000 for housing loan interest.
  • Co-owned Let-Out House Property
    The income will be calculated as per normal provisions of House Property and it will then be apportioned among each co-owner. Each co-owner can claim the deduction for housing loan interest.

Tax Benefits on Rental Income

Taxpayers having a rental income can claim the following deductions and benefits in the Income Tax Return (ITR).

  • Repayment of Loan – deduction of principal amount under Sec 80C
  • Interest on Home Loan – deduction under Sec 24 of House Property subject to the prescribed limit discussed above
  • Sec 80EE – Additional deduction of INR 50,000 for Interest on Home Loan for first time home buyers subject to prescribed conditions
  • Sec 80EEA – Additional deduction of INR 1,50,000 for Interest on Home Loan for first time home buyers subject to prescribed conditions

TDS on Rent Income

If you have income from rent, the tenant would deduct TDS in the following situations:

  • Section 194I – TDS on rent of land or building deducted at 10% if the rent amount exceeds INR 1,80,000 per annum.
  • Section 194IB – TDS on rent of land or building deducted by individual or HUF (not liable to tax audit). TDS is deducted at 5% if the rent amount exceeds INR 50,000 per month.

The taxpayer i.e. landlord would receive Form 16A from the tenant once the tenant files the TDS Return every quarter. The taxpayer can view TDS Credits in Form 26AS on the income tax website and claim the TDS Credit in the Income Tax Return.

ITR Form for Rental Income

The taxpayer should file the ITR Form based on the amount of total income, type of house property income and income under other heads. Here is a summary of ITR Form that a taxpayer can file in case of rent income.

ITR Form Total Income HP Income
ITR 1 or ITR 4 Upto INR 50 lacs One House Property
ITR 2 or ITR 3 More than INR 50 lacs Multiple House Property

Set-Off & Carry Forward House Property Loss

House Property Loss can be set off against any other income in the current financial year. The remaining loss can be carried forward for 8 years and set off only against house property income in future years.

As per the Income Tax Act, a taxpayer who files Belated ITR u/s 139(4) cannot carry forward loss to future years. However, the taxpayer can carry forward house property loss even if he/she files a Belated Return.

FAQs

What is the difference between Sec 194I & Sec 194IB for TDS on Rental Income?

As per Section 194I, individuals or HUF (not liable to tax audit in the previous financial year) are not required to deduct TDS on payment of rent even if the rent exceeds INR 1,80,000 per annum. Under Budget 2019, individuals or HUF (not liable to tax audit in the previous financial year) must deduct and deposit TDS at 5% if the rent exceeds INR 50,000 per month.

What is the difference between Section 80EE & Section 80EEA?

A taxpayer can claim a deduction of either u/s 80EE or 80EEA. The government had introduced the deduction u/s 80EE for first time home buyers. The taxpayer can claim Sec 80EE deduction of up to INR 50,000 for interest on loan sanctioned between 1.4.16 and 31.3.17.
Later, this benefit was extended by introducing Sec 80EEA. A taxpayer can claim Sec 80EEA deduction of up to INR 1,50,000 for interest on a loan sanctioned between 01.04.19 and 31.03.21.

Do I have to pay tax in India on income from house property situated outside India?

If you hold status of a resident, income from property situated outside India is taxable whether such income is brought into India or not.
If you hold status of a non-resident or RBNOR (resident but not ordinarily resident), income from property situated outside India is taxable only if such income is received in India.

Co-Owner and Deemed Owner of Property

It is very common in India to own a house property jointly with a spouse or children. This increases the chances to receive a higher loan amount. As per Section 27 of the IT Act in some cases, the legal owner is not considered as the real owner of the property. In fact, someone else is considered as the deemed owner of the property. Therefore, the income tax implications are different in both cases.

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Deemed Owner

Income from house property is taxable in the hands of its owner. In some cases, the legal owner is not considered as the real owner of the property. In such cases deemed owner is treated as an owner. He/She is liable to pay tax on income earned from such house property. Following are the cases where the person is deemed to be the owner of the property even if they are not the legal owners of the property:-

  • Transfer to Spouse
    • An individual transferring their property to their spouse otherwise than for adequate consideration. In this case, the transferor is also a deemed owner of the house property. But this excludes cases where a property is transferred to a spouse in connection with an agreement to live apart
  • Transfer to Minor Child
    • An individual transfers any house property to their minor child for inadequate consideration. In this case, the transferor shall be deemed to be the owner of that house property transferred. However, this shall not cover cases where a property is transferred to a minor married daughter
  • Holder of an Impartible Estate
    • Impartible Estate is a property that cannot be legally divided. Therefore, the holder of an impartible estate shall be deemed to be an individual owner of all the properties in the estate.
  • Member of a co-operative society, company, or other association of persons
    • A member of a co-operative society, company, or other association of persons to whom a building or part thereof is allotted under a House Building Scheme of a society/company/association, shall be deemed to be the owner of that building or part thereof allotted to him although the co-operative society/company/association is the legal owner of that building.
  • Possession of a Property
    • As per the Income Tax Act “A person who is allowed to take or retain possession of any building or part thereof in part performance of a contract of nature referred to in Section 53A of the Transfer of Property Act, 1882 shall be deemed to be the owner of that building or part thereof.”
  • Rights in a Property
    • A person who acquires any right in or with respect to any building or part thereof, as is referred to in section 269UA(f). This person shall be deemed to be the owner of that building or part thereof.
    • However, it excludes any rights by way of a lease from month to month or for a period not exceeding one year

Co-Owner

When a house property is jointly owned by one or more persons then each joint owner is known as co-owner. As per the Income Tax Act “If house property is owned by co-owners and their share in house property is definite and ascertainable than the income of such house property will be assessed in the hands of each co-owner separately”. While computing Income from House Property, the annual value of the property will be taken in proportion to their share in the property.

FAQ

What rights do co-owners of property have?

Co-owners have equal rights to possession of the property, the right to use and the right to dispose of his share of the property.

What is meant by the annual value of the property?

Annual Value is the estimated rent that you could get if the property was rented out. However, it is based on the following factors that are key to consider while calculating the annual value:
– Actual Rent received or receivable
– Municipal Value
– Fair rent
– Standard rent
– Expected rent.
Gross annual value = Higher of actual rent received or Expected Rent*
Expected Rent* = Higher of Municipal Value or Market rental value (in line with the Standard Rent as per Rent Control Act)

I have transferred my flat to my wife as a gift. She receives monthly rental from this flat. How will this income be taxable?

Since the flat has been given to your wife as a gift for nil consideration, you will be considered as the “deemed owner” of the house. Therefore the rent income from the flat will be clubbed in your hands and the same shall be taxed as house property income.

What is Pre-construction Interest?

The pre construction period is from the day of approval of home loan until the day of completion of the construction of house property. The interest deduction is not allowed while the property is still under construction. However, the interest paid during the pre construction, namely the Pre-construction Interest, is allowed as a deduction in 5 equal installments starting from the year in which the construction of the property is completed.

How to calculate Pre construction Interest?

  1. Calculate the Pre construction period of constructed house property.

    It is from the year of home loan taken till the year in which construction is completed. However, the interest will be allowed from the date of loan taken till the 31st March before the financial year in which construction is completed.

  2. Calculate the interest paid during the pre-construction period from the interest certificate issued by the bank.

    Each year the lending bank issues an annual home loan certificate which provides details of total EMI paid along with Interest and Principal Repayment.

  3. Divide the total pre construction interest in 5 equal installments.

    Claim the deduction of pre-construction interest from the financial year of completion of construction while filing ITR on the Income Tax e-Filing portal under the head “Income from House Property”.

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Example

Kunal has taken a loan for the construction of house property in Pune. Here are the loan details:

Loan amountRs. 30,00,000
Loan taken inNovember 2017
EMIRs. 25,000
Construction completed inDecember 2019

Right after the completion of construction, Kunal was able to find a tenant and so he gave the property on rent right away. Kunal wants to know how much tax deduction he can claim for this home loan while filing his return for the FY 2019-20.

As discussed earlier, the homeowner can claim interest deduction from the year in which the construction of the property is completed. Hence Kunal will be able to claim deduction on Pre-construction interest from the FY 2019-20.

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Calculation of EMI payments for FY 2019-20

  • Total EMI payments in FY 2019-20 = Rs. 25,000 x 12 = Rs. 3,00,000. Out of this Rs. 3,00,000, Rs. 1,35,000 is towards principal repayment
  • Hence Rs. 1,35,000 is allowed as a deduction under section 80C of the income tax act.
  • So total interest payment for the FY 2019-20 comes to Rs. 1,65,000 and since the property is rented out, Kunal can claim the deduction for the entire interest amount u/s 24(b) while filing ITR.

Calculation of amount paid for Pre-construction interest

  • As explained above, the pre construction interest will be allowed in five equal installments from the year in which the construction is completed
  • The interest will be allowed from the date of loan taken till the 31st March before the financial year in which construction is completed.
  • In this case, the construction is completed in December 2019 so the pre-construction interest will be calculated for 17 months for the period November 2017 till March 2019.
Financial yearPeriodEMI calculation
2017-18November 2017 to March 2018Rs. 25,000 x 5 = Rs. 1,25,000
2018-19April 2018 to March 2019Rs. 25,000 x 12 = Rs. 3,00,000
Total
= Rs. 4,25,000
  • Out of this Rs. 4,25,000, Rs. 1,91,250 is towards principal repayment.
  • So the remaining part of Rs. 2,33,750 (Rs 4,25,000 – Rs. 1,91,250) is the pre-construction interest which can be claimed in five equal installments of Rs. 46,750 starting from FY 2019-20.

So Kunal will be able to claim Rs. 1,65,000 + Rs. 46,750 = Rs. 2,11,750 as deduction towards home loan interest in FY 2019-20.

FAQs

What is pre construction period in income tax?

The period from borrowing money until construction of the house is completed is called the pre construction period. Interest paid during this time can be claimed as a tax deduction in five equal installments starting from the year in which the construction of the property is complete.

What is the maximum limit of interest on housing loan exemption?

Under Section 24 of the Income Tax Act, an individual can claim tax deduction of the interest payment on the housing loan up to a maximum amount of Rs. 2,00,000. However, there is no limit on the interest payment deduction of the property is rented.

Can the husband and wife both claim interest on the housing loan?

Each joint owner/ co-owner and a borrower can claim Rs 2 Lakhs interest deduction – In case of a joint home loan for self-occupied house property, each of the owners can claim Rs 2 Lakhs in their tax return. The total interest is allocated between them based on their share of ownership.

Which ITR needs to be filed for claiming pre construction interest?

The taxpayer can file ITR-1 if no co-owner is present. Otherwise, you need to file ITR-2.

Guide: Income from House Property and Taxes

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 isn’t a House Property.
  • Further, House Property includes residential houses, godowns, cinema building, workshop building, hotel building, etc.

Any income generated from the House Property is Income from House Property. Income from House Property shall be taxable only under the following conditions:

  • The assessee must be the owner of the property.
  • The property 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 taxable 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.
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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 property is 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.

From AY 2020-21 you can show 2 properties self-occupied house property.

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How to Calculate the Net Annual Value of Self-Occupied House Property?

For example, Ayush owns a primary residence on which he has taken a home loan. He has paid INR 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

Particulars Self occupied
Gross Annual Value (GAV) NIL
Less: Property Taxes paid NIL
Net Annual Value (NAV) NIL
Less: 30% Standard deduction on NAV NIL
Less: Interest payable on Home Loan (1,20,000)
Income/(loss) from House Property (1,20,000)

What is a Let Out House Property?

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

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How to Calculate the Net Annual Value of Let Out House Property?

For example, Ayush has rented out a property, with an annual rent of INR 1,80,000. Ayush has paid INR 15,000 in municipal taxes and has also taken out a home loan, and paid INR 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

Particulars Letout
Gross Annual Value (GAV) 1,80,000
Less: Property Taxes paid 15,000
Net Annual Value (NAV) 1,65,000
Less: 30% Standard deduction on NAV 49,500
Less: Interest payable on Home Loan 1,20,000
Income/(loss) from House Property (4,500)

Home Loan Benefits

Tax benefits for Home Loan are available as under:

Deduction for Home Loan Interest (Section-24)

Current Regime

  • Owner of the House Property can claim a deduction of up to INR 2 Lakhs (INR 1,50,000 in case you are e-filing for FY 2013-14) if the property is Self Occupied as explained above.
  • In the case of a Let Out House Property, the entire Home Loan interest will be allowed as a deduction.
  • The deduction will be restricted to INR 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 the loan was taken.

Moreover, 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 INR 30,000. Also if the loan is taken in the pre-construction period interest paid during this period can be claimed as a deduction in five equal installments 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 INR 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 INR 90,000.

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

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

Deduction for principal repayment (Section-80C):

Current regime

  • Deduction for principal repayment of Home Loan is available up to a maximum of INR 1,50,000 subject to the overall limit Section 80C. Satisfy the following conditions to claim this deduction:
    • Acquire Home Loan 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 collected 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 permissible as a deduction under section-80C subject to a maximum limit of INR 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.

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 INR 25 lakh will be eligible for an additional deduction of interest up to INR 1 lakh.
  • Fulfill the following conditions to claim this deduction:
    • The loan sanction must have been between 1st April 2013 to 31st March 2014.
    • The Home Loan amount does not exceed INR 25 Lakhs
    • The value of House Property does not exceed INR 40 Lakhs.
    • The assessee does not own any other residential House Property on the date of sanction of the loan.
  • The benefit of the deduction spans over FY 2013-14 and FY 2014-15. If you are unable to utilize the total limit of INR 1,00,000 in FY 2013-14, then you can claim the balance amount 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 remember 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 resgister themselves as co-owners of the property &
    • They must also be co-borrowers for the loan.

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 INR 50,000 to INR 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” with the introduction of section 80EEA which can help people like Ayush to get a higher deduction up to INR 1,50,000 against INR 50,000 as per the current regime.

New Regime

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

Income Tax Deductions for Joint Owners

Co-owners and co-borrowers

  • In the case of co-owners of self-occupied house property who are also co-borrowers of a home loan, each one of them can claim a deduction on interest on the loan limited to Rs. 2 Lakh each.
  • Each of them can also claim the deduction on principal repayments, stamp duty as well as registration charges under Section 80C with the overall limit of Rs.1.5 Lakh. The ratio of the deduction of each benefit will be in the same as the share of ownership in the property.

Co-borrowers but not Co-owners

  • If any one individual is a co-borrower of a loan and is not the owner of the property, he or she is not entitled to claim interest on the home loan paid.
  • Also, he or she is not entitled to any benefits on principal repayment, stamp duty, etc.

Co-owners but not Co-borrowers

  • If one individual is just a co-owner of a loan and is not the co-borrower of the property, he or she is not entitled to claim interest on the home loan paid.
  • However, each of them can claim the deduction on stamp duty as well as registration charges under Section 80C with the overall limit of Rs.1.5 Lakh. The ratio of the deduction of each benefit will be the same as the share of ownership in the property.

Setting off losses from house property

Current regime

As per the current income tax regime, it is possible to set off losses made from house property against any other income head i.e, business and profession or salary income, etc. Moreover, it is also possible to set off brought forward losses and carry forward losses 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, it is not possible to set off brought forward losses and carry forward losses from income from house property in the new income tax regime.

For example, Ayush has an annual salary of INR 7,00,000. He had INR 2,00,000 loss from house property. It is possible to set off his loss from house property 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.

Calculation of Income from House Property

The owner of the property charges the annual value of the property under the head ‘Income from House Property’. The income from property used for the purpose of carrying business or profession is not taxable 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 Let-out & Self occupied if

  • Rent received INR40,000 per month (in case of let out scenario).
  • Property taxes paid INR 30,000.
  • Interest on Home Loan INR 2,35,000.
Particulars Let-out Self occupied
Gross Annual Value (GAV) 4,80,000 NIL
Less: Property Taxes paid 30,000 NIL
Net Annual Value (NAV) 4,50,000 NIL
Less: 30% Standard deduction on NAV 1,35,000 NIL
Less: Interest payable on Home Loan 2,35,000 (2,00,000)*
Income/(loss) from House Property 80,000 (2,00,000)**

* In case of self-occupied property, the deduction for interest on Home Loan is restricted to the maximum of INR 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’.

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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?

Yes, you can. You can avail of the benefits of HRA and deduction for Home Loan 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 a maximum of INR 2,00,000.
You can claim the following if you are living in a rental house and have rented out your house too:
HRA for the rent you pay to the landlord &
Deduction for Home Loan interest without any limit.

FAQs

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.

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.

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.

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 INR 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.

Income from Deemed Let Out House Property

As per the income tax act, assessee can declare 2 house properties as Self-occupied while he/she has to compulsorily declare all others as rented out. It means the subsequent properties are considered as deemed let out House Property. Further, assessee needs to calculate rent based on fair market value and tax is levied on the same. Deemed Let Out Property is also known as Vacant Property.

Up to FY 2018-19, a taxpayer was allowed to claim only 1 property as Self Occupied and the rest were considered as Deemed Let Out. However, from FY 2019-20, a taxpayer can claim 2 properties as Self Occupied. This will help those taxpayers who own more than 1 property.
Tip
Up to FY 2018-19, a taxpayer was allowed to claim only 1 property as Self Occupied and the rest were considered as Deemed Let Out. However, from FY 2019-20, a taxpayer can claim 2 properties as Self Occupied. This will help those taxpayers who own more than 1 property.

The calculation of income from Deemed let-out property is similar to Let Out House. However, deduction u/s 24(b) is available up to 2 lakhs rupees i.e, same as Self Occupied.

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. 

In case you have multiple house properties, from AY 2020-21 you can show 2 properties self-occupied house property.
The other house properties are vacant then they should be taken as deemed let-out house property.

How to Determine Taxable Income from Deemed Let Out House Property?

Income from Deemed Let Out Property is calculated as per the following steps:

  1. Calculate Gross Annual Value (GAV)
  2. Deduct Municipal Taxes
  3. Calculate Net Annual Value (NAV)
  4. Claim Standard Deduction of 30%
  5. Deduct Interest paid on Home Loan u/s 24(b)

  1. Calculate Gross Annual Value (GAV)

    GAV of Deemed let out property is least of the following:
    – Fair Rent Value (FRV) (Determined using Annual Rent Value of similar properties in your area)
    – Assessed Value (Determined as per Municipal Tax Value of the property)
    – Standard Rent (Determined as per Rent Act)

  2. Deduct Municipal Taxes Paid

    Municipal tax is nothing but a property tax paid by a taxpayer. The deduction of the full amount of Municipal Taxed paid is allowed. It reduces the Net Annual Value of the property. This deduction is not allowed if not paid by the owner

  3. Calculate Net Annual Value (NAV)

    NAV is nothing but GAV reduced by Municipal Taxes Paid.

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
Not Applicable INR 2 Lakh Limit XX
No Limit
XX
No Limit
Income from House Property (XXX) XX XXX
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FAQs

What is the difference between let out and deemed let out?

Property that is given on rent for the whole or part of the year is termed as Let Out House Property. If a person has more than one, in such a case only one can be considered as self-occupied at the option of the individual.

How do you claim loss on property?

A taxpayer can claim deduction under Section 24 of interest paid on home loan for each of the houses separately. However, the overall loss from property that can be claimed for a year is restricted to INR 2 lakhs.

Can we carry forward loss from self occupied house property?

In case the Loss from House Property has not been adjusted in the same year, such loss will be carried forward to the next year and allowed to be set off with income arising other the same head i.e. House Property.

Income from Let out House Property

Homeownership is an eternal dream of the Indian middle class. As more and more of us own our primary residence and some even rent out secondary properties, which is Let Out House Property. It is important to under tax implications. House Property Income can be classified into 3 categories as per Income Tax Act:

  1. Self-occupied House / Permanent Residency
  2. Let out House / Rented Property
  3. Deemed Let out House Property/ Vacant House
Earned Income from House Properties?
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How to Calculate Let Out House Property Income?

  • Rental Income:
    • Total Rent received during the financial year by the owner of the property.
  • Municipal Taxes:
    • If you have paid any Municipal Taxes, then you can claim a deduction of the same under Section 23.
  • Standard deduction:
    • As a homeowner, you incur all kinds of expenses from the maintenance & upkeep of your possession. However, one cannot claim these expenses as expenditure against rental income. In order to overcome this hardship, a homeowner can avail a 30% standard deduction on Net Annual Value under Section 23.
  • Home Loan Interest Payment: 
    • You can consider Interest paid as an expenditure while calculating income from house property.
      • Self Occupied Property allows the deduction of up to Rs. 2,00,000
      • Deduction up to rent amount is allowed as a deduction. However, you can not set off a loss of more than Rs. 2,00,000 against other incomes.
  • Home Loan Principal Repayment as Deduction: 
    • As per Section 80C, one can claim principal repayment of up to Rs. 1,50,000 as a deduction.
    • Additional deduction u/s 80EE of Rs. 50,0000 to First Time Home Buyers.
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.
Tip
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.

Benefit of Co-ownership of Property

When two or more people jointly own a property they are called co-owners. If it is co-owned then such income is taxable in the hands of each co-owner as per their respective ownership percentage. This is a great way to save taxes.

Income Tax Deductions for Joint Owners

Co-owners and co-borrowers

  • In the case of co-owners of self-occupied house property who are also co-borrowers of a home loan, each one of them can claim a deduction on interest on the loan limited to Rs. 2 Lakh each.
  • Each of them can also claim the deduction on principal repayments, stamp duty as well as registration charges under Section 80C with the overall limit of Rs.1.5 Lakh. The ratio of the deduction of each benefit will be in the same as the share of ownership in the property.

Co-borrowers but not Co-owners

  • If any one individual is a co-borrower of a loan and is not the owner of the property, he or she is not entitled to claim interest on the home loan paid.
  • Also, he or she cannot claim any benefits on principal repayment, stamp duty, etc.

Co-owners but not Co-borrowers

  • If one individual is just a co-owner of a loan and is not the co-borrower of the property, he or she is not entitled to claim interest on the home loan paid.
  • However, each of them can claim the deduction on stamp duty as well as registration charges under Section 80C with the overall limit of Rs.1.5 Lakh. The ratio of the deduction of each benefit will be the same as the share of ownership in the property.
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FAQs

Which ITR needs to be filed for Rental Income?

Rental Income is considered under the head “Income From House Property”. And ITR 1 needs to be filed if only one house is owned. Otherwise, ITR 2 needs to be filed.

Can I carry forward the loss from House Property Income?

Yes, you can carry forward the loss for 8 years. It can be set off against House Property Income only.

Who is deemed owner?

The deemed owner is the person who is getting rental income but is not the actual owner. Following are the deemed owners:
1. Spouse of a person to whom ownership is transferred without any monetary consideration,
2. Minor Child of a person to whom ownership is transferred without any monetary consideration.

Is rental income from sub-letting chargeable to tax under the head “Income from House Property”?

No. Any income received by a tenant from sub-letting is not taxable under this head. It is taxed under the head “Income from other Sources” or “Profit and Gains from Business or Profession” as the case may be.

Can I claim expenses like property tax or maintenance charges on a self occupied property?

No. You cannot claim expenses on a Self Occupied Property. However, if you have a property loan, you can claim the Interest paid on such loan as an expense under the head Income from House Property in the ITR. You can claim expenses on a Let Out House Property.