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.
Note: 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’.
Note: The following situations of income from house property located outside India are considered for taxpayers based on their residential status:
- 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.
- 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:
|Row||Particulars||Amount (In INR)|
|A||Annual Rental Value (12 months) (GAV)||xxxxxx|
|B||Less: Municipal Tax/Property Tax||xxxxxx|
|C||A-B = Net Annual Value (NAV)||xxxxxx|
|D||Less: 30% standard deduction on NAV u/s 24(a)||xxxxx|
|E||Less: Interest on Home Loan u/s 24(b) (if any)||xxxxx|
|F||C-(D+E) = Income from House Property||xxxxxxx|
The last row of the above table gives the taxable income from House Property.
- Rental value should be equal or more than the reasonable rental amount suggested by municipality of the area.
- 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.
- 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:
- Tax Deduction over Home Loan Expenses
- 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
- Maximum loss set off allowed in a financial year is limited to Rs 2,00,000. Balancing loss can be carried forward to future years – 8 years in total.
- 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.
Conditions for Claiming Home Loan Deduction
Note: Criteria for Joint Owners:
- 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.
Adjustments on Loss from House Property
- 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.
Frequently Asked Questions
- How a taxpayer, who is earning income from salary as well as from house property, can file his/her IT Return?
Answer: 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 Gross Annual Value of a House Property is calculated, if it remained vacant/self-occupied for some period and on rent in the rest time in a FY?
Answer: According to Section 23, Annual Value of a House Property is dependent of these factors:
- Actual Rent Received/Receivable
- Municipal Value of the Property (Standard rental value considered by Local Municipal Authority for the Property)
- Fair Rent, which is the annual rent received from a similar property available in the same locality
- Standard Rent, which is the rate fixed under Rent Control Act (owner is expected not to take higher rent than this amount)
Now, Gross Annual Value is computed by any one of the following methods, whichever is applicable:
Clause A: Reasonable (which is usually the Fair Rent) rent received from a property (whole or part) from year-to-year, called Expected Rent. This is found by taking Municipal Value or Fair Rent, whichever is higher in amount (both of them should be less than Standard Rent)
Clause B: Rent received from a property (whole or part) that is more than the rental value as mentioned in Clause A, called Actual Rent
Clause C: Rent received from a property (whole or part) that is less than the rental value as mentioned in Clause A, called Actual Rent
Situation 1: When a property (whole or part) is let out and was vacant for whole/part of the FY
In such situation, two cases can arise:
- If Clause B is valid for the case, actual rent is taken
- If Clause C is valid for the case, based on the validity of all the conditions of Situation 1, actual rent is taken
Situation 2: When a property (whole or part) is let out and was self-occupied for whole/part of the FY
In such situation, Gross Annual Value is the higher amount between either Clause A or Actual Rent (Clause B/C)
- How the income tax is calculated for a taxpayer who is earning rental income from more than one house properties?
Answer: Tax liability should be computed for each of the house properties separately.
- Is a taxpayer remains eligible for Home Loan deduction, in case he/she sells the house property?
Answer: As per Section 80(C)5, if a house property is sold within 5 years from the date of purchase/possession, the sum of all the annual deductions claimed over Principal Repayment u/s 80C till the date of selling the property will be revoked, i.e., the sum of all these deductions will be added to the selling amount of the property and liable for taxation. The same rule applies for the deduction claimed on registration, stamp duty, other expenses of transfer within the limit of 80C, for this situation. That is, the whole of the deduction claimed within the limit of 80C over these expenses will be added up on the selling value of the property and fall under relevant tax margin. Deduction over Home Loan Interest payment u/s 24(b) is allowed even if the property is sold/transferred.
- What are the options to carry forward the loss in Income from House Property?
Answer: Loss on the income under the Head ‘Income from House Property’ can be carried forward for a period of 8 years immediately succeeding the loss, even if the taxpayer fails to file IT Return for it within the due date, as per Section 139(1). Such adjustments are made following these conditions:
- If the unfulfilled loss amount arose out of income from House Property is brought to next FY, it can be recovered from income from any other source with a limit of up to INR 2 lakh.
- If the loss is still to cover for more years, it should be recovered with the income from house property only.
- Can a taxpayer avail for deduction over the loan taken from friends/relatives for the purpose of house property?
Answer: Yes. Provided the loan amount is used for purchase, construction, repair, renewal or reconstruction of the house. Otherwise, no deduction will be allowed.
- What is the tax liability of an NRI who is earning an income from house property located in India?
Answer: Same conditions are applicable for NRIs on Income from House Property as followed for the residents, including provision for standard deduction, benefits on home loans. But, such rental income for the NRI is subject to TDS payment @ 30%.
- If the rental income is collected and used by a person who is not the owner of a house property, who will be liable to pay the income tax?
Answer: Tax liability of income from House Property is in hands of the owner of the property. So, even if the rent is collected by any other person, the owner will be liable to pay the income tax for this rental amount unless the property is transferred or sold.
- Is a deemed owner liable of paying income tax under Income from House Property?
Answer: Yes. As per the Income Tax rule, only legal owner of a house property is liable to pay the income tax for the income from house property. In some situations, as stated below, the owner may not have the direct possession over the property, but will be treated as its ‘Deemed Owner’ and liable to pay any tax levied on the property.
- Individual who has gifted a property to spouse/minor child
- Holder of impartable estate, i.e., where a HUF family holds a property on behalf of all its members, the family is treated as the property’s owner, although the ownership is in the name of individual members of the family.
- Member of Cooperative Society/Company/Other Association, who has been allotted with a building under House Building Scheme of the Society
- Individual permissible under Section 53A of Transfer of Property Act, which states that the person who has purchased a property but yet to be registered with the legal agreement to buy a property with concerned authority
- Long Term Lease Holder, where the lease period is more than 12 years
- How is Unrealised Rent treated in Income from House Property?
Answer: In the circumstances, where a tenant fails to pay rent to the owner of the property and the owner’s income is thus reduced, the unpaid rent is termed to be ‘Unrealised Rent’. Such rent is allowed to be deducted from net taxable income the owner has fetched under ‘Income from House Property’, iff the following conditions are satisfied:
- The tenancy is bona fide
- The defaulting tenant has vacated or steps have been taken to make him/her vacate the property
- The defaulting tenant is not in occupation on any other property of the assessee
- The assessee has availed all possible reasonable options of legal proceedings for obtaining the rent. Alternately, he succeeds in convincing the AO (Assessment Officer) of the fact that any legal proceeding is not going to work in the particular situation.