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For the purpose of tax computation, the Income Tax Act has divided the income received by an individual into five different heads. One of them is 'Income from House Property', which is the income earned by the assesse from a property. If an individual owns a house property, the rent received becomes taxable. This actual rent received or the notional rent is referred to as ‘annual value’. However, if the taxpayer uses this property for operating or running a business or profession, it will not be taxed as income from home property.
The house property comprises of the building and/or any land attached to it
The taxpayer is the owner of the property
The taxpayer should not use the house property to run any business or profession
Annual value: This is the actual rent received or to be received by the property owner on renting out the house.
Municipal value: This is the value on house property as calculated by the municipal authorities for imposing municipal taxes.
Fair rent value: Fair rental value is the rent which a similar property with similar features in the same locality would fetch.
Standard rent: The standard rent is determined under the Rent Control Act. If the standard rent has been fixed for any property under the Rent Control Act, the property owner cannot charge a rent higher than the standard fixed rent.
Gross Annual Value (GAV): This is the highest of:
Fair market value
In case the Rent Control Act applies, Gross Annual Value will be the highest of:
Net Annual Value: NAV is calculated as Gross Annual Value minus Municipal Taxes paid.
Deductions: To ascertain the actual taxable income, the taxpayer can claim the following deductions under Section 24 of the Income Tax Act, 1961.
Standard Deduction: The assesse can claim 30% of the NAV as a deduction towards rent collection, repairs etc., irrespective of what the actual expense incurred is. This deduction will not be permitted in case the GAV is nil.
Interest on home loan: Deduction can be claimed for interest on home loan under Section 24 of the Income Tax Act. The limit under this section is Rs 2 lakhs.
Conditions associated with claiming tax exemption on home loan interest are:
Loan should be availed after 1st April, 1999 for property purchase or construction.
The taxpayer can claim benefits for repairs or reconstruction work of an existing property.
Processing and prepayment charges shall be regarded as interest payment.
The purchase or construction needs to be completed within 3 years from the end of the financial year in which the loan was availed.
If the house that the assesse is staying in is the only property he or she owns, the annual value will be nil. However, if the individual has multiple properties, all with the purpose of self-occupation, he or she can only specify one of the property’s annual value as nil. The annual value of the remaining properties will be assessed according to the expected rent if the property was let out.
Calculation of Income from House Property:
|Gross Annual Value||XXX|
|Less: Municipal Taxes||(XXX)|
|Net Annual Value||XXX|
|Less: Deduction under Section 24||(XXX)|
|Standard Deduction @ 30%||(XXX)|
|Interest paid on Borrowed Loan||(XXX)|
|Income from House Property||XXX|
Computation of Income Under House Property – Self Occupied & Let Out:
|Type of House Property||Self-Occupied||Let Out|
|Gross Annual Value||Nil||XXX|
|Less: Municipal Taxes or Taxes paid to local authorities||Not applicable||XXX|
|Net Annual Value||Nil||XXX|
|Less: Standard Deduction||Not applicable||30% of NAV|
|Less: Interest on Housing Loan||Restricted to Rs. 2 lakhs||No limit|
|Income from House Property||XXX||(From FY 2017-18 restricted to Rs. 2 Lakhs)|
Tax on the house is calculated on the property's NAV.
If the taxpayer’s house is vacant for a certain period of time and later let out, the computation of Income from House Property should be done only for the rent received - not for the entire year.
If the taxpayer’s house is vacant for the whole year and the individual is living in another city due to his or her employment, but is still paying municipal taxes, then this can be set off against income from other sources during the same year.
There are a number of measures an individual can undertake to save tax on Income from House Property. They are:
Become co-owners: If the individual and his or her spouse have jointly taken a home loan, both can claim tax exemption towards payment of principal and interest.
Thinking about getting a second home: If the assesse already has one property registered in his or her name, it is a good idea to register the second property in the name of individual's spouse or relative so as to avoid excess taxation.
Multiple properties ownership: The Income Tax Act, 1961, states that if an individual owns multiple house properties, only one of these will be regarded as self-occupied. The taxpayer needs to evaluate the tax liability on all the properties he or she owns and occupy the one with the highest tax liability and give out the others on rent.
What kind of income get taxed under the head ‘Income from House Property’?
Rental income from a property, comprising of the building and/or any land attached to it, of which the taxpayer is the owner, is taxable under the head ‘Income from House Property’.
If a property is not used for residence by the taxpayer, can he or she still treat it as a self-occupied property?
A self-occupied property is one that is occupied by the owner for his or her residence throughout the year. However, there is one way a taxpayer can treat a property he or she is not occupying as a self-owned property. If the following conditions are met, the annual value of a property will be considered nil even though the owner is not occupying it:
The property is owned by taxpayer
The owner is unable to reside in the property due to his employment, which requires him or her to reside at another place
The house property is not let out any time during the year
Can tax benefits be claimed for interest paid on loans taken from friends and relatives while calculating Income from House Property?
Yes, if the loan is taken for purchase, construction, repair, renewal or reconstruction of the house, the house owner can claim a deduction under Section 24(B) for the interest on home loans. It must be noted that the friend or family member who is lending will be liable to pay tax on the interest earned from the loan.
If the property owner rents out his or her property, what expenses can be deducted from gross annual value while calculating income chargeable to tax under Income from house?
While calculating income chargeable to tax under Income from House Property, in case of a property rented out, the following items can be claimed as deductions from gross annual value.
Deduction on account of municipal taxes paid by the taxpayer during the year
Deduction under section 24(A) at 30% of Net Annual Value
Deduction under section 24(B) on account of interest on home loan