Owning a house property may earn you a profit, but that profit is taxable. In case the property leaves you with losses, then those losses are adjustable in the final income tax computation. To know more about the specific details of Income from house property, keep reading.
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It is often said that if you hold on to what you buy, real estate will turn out to be one of the safest investments in the world. Land gives you good returns without having to work hard for it every second of the day. With the least amount of risk involved, earning money through a piece of land you or your family invested in, seems like a good deal. However, there is a lot of financial planning involved as this income is taxable in the eyes of the law.
What is Income from House Property?
According to Section 14 of the Income Tax Act, 1961, there are several ways through which a person can earn income. This income is taxable. For the process of tax computation, these methods are broadly categorised under five heads. Income from house property is one such head.
In the Income Tax Act 1961, Sections 22 to 27 are committed to specifying the terms for the income tax computation of the total standard income of a person that is earned through the house property or land owned. The rental income derived due to the commercial or residential use of the house property is taxable. However, if the property is used by the taxpayer for his or her own business or profession, the income is classified under a different head – ‘Income from Profits and Gains of Business or Profession’. This property could be a home, an office, a shop, a building, or some vacant land. The tax calculation is different for different types of properties.
If the property is vacant and not let out, tax for the potential income that could be earned through it, also known as deemed rent, would be imposed.
Types of Income from House Property
House properties and the income earned through them can broadly be classified under 2 categories
- Self-occupied house property – In this case, the income earned is zero.
- Let out house property – In this case, the income earned is the actual amount of rent collected.
How to calculate the gross annual value of house property?
Income from house property is the total amount of money acquired by the assessee in the given year due to the land owned. The gross annual income earned through house property is calculated differently for different categories. Mentioned below are the different categories.
Read: Tax On Rental Income: Exemptions and Deductions
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Category 1 – House property that was let out/ rented out for the duration of the past year.
The Gross annual value of a house property which was rented out in the past year is the higher amount of the below-mentioned cases:
a. Expected rent/ Deemed Rent which is taken as the higher of the Municipal valuation or Fair Rental Value.
b. The precise amount of rent derived (or receivable) by the assessee of a property that is partly or completely let out.
It states that if the amount of rent earned is more than the expected rent, the amount earned shall be considered as the Gross annual value of the house property. If the amount of rent earned is lower than the expected rent, the expected amount is the Gross annual value of the house property.
Expected/ deemed rent is the greater value of the Municipal value or the fair rental value.
Category 2 – House Property which was partly let out/ rented and partly vacant during the year.
If the house property was rented for a fixed amount of time and left vacant throughout the rest of the previous year, there can be two cases.
Case 1 – The amount of rent earned is higher than the expected rent despite the vacant period. In such a situation, the gross annual value of a house property is the actual rent received.
Case 2 – The amount of rent earned is lower than the deemed rent due to the vacant portion of the time. In such a scenario, the gross annual value of a house property is the actual rent earned.
Category 3 – House Property which was let out/ rented for some duration of the year and self-occupied for the rest of the year.
In this case, the time during which the house property was utilised for the taxpayer’s use is not of importance. The gross annual is the higher value of the expected rent for the entire year or the actual rent received for letting out the property for a fixed duration of time.
Read: Rent House in Delhi: Tips and Tricks for Securing Your Ideal Rental
How to calculate income from house property?
Here’s how to figure out how to compute income from house property:
- Gross Annual Value (GAV) of the property (how to calculate the gross annual value of house property) – The annual value of a self-occupied house is nil. It is the rent earned for a residence on rent for a rented out property. How to calculate Income for a self-occupied house property is a frequently asked question that the article will further answer.
- Reduce Property Tax – When property tax is paid, it is deducted from the GAV of the property.
- Net Annual Value (NAV) (how to compute the annual value of house property) – Net Annual Value = Gross Annual Value – Property Tax
- Reduce 30% of NAV to standard deduction – Section 24 of the Income Tax Act allows a deduction of 30% of NAV. Other expenses, like painting and repairs, are not eligible for tax relief beyond the 30% maximum. Case laws on income from house property are strict in India. The question of ‘How to Save Tax on Income from House property?’ is easy if you know the correct hacks and tricks.
- Reduce house loan interest – Interest paid on a housing loan during the year is also deductible under Section 24.
- Determine your house property income – The resulting value is your house property income. This is taxed at the applicable slab rate. The annual value of a self-occupied house goes through variation as per the real estate market.
- Loss from house property – Because the GAV of a self-occupied house is zero, claiming the home loan interest deduction will result in a loss from house property. Calculation of income from a house property must be calculated carefully.
Claiming Deduction on Home Loan
- The amount of the deduction is determined by your ownership stake in the property.
- Your name must also be on the mortgage. These deductions are also available to co-borrowers.
- Only the financial year in which the construction is finished is eligible for the home loan deduction.
- Send your employer your home loan interest certificate so he can modify your tax deductions at the source. This document contains information about your ownership stake, borrower information, and EMI payments, which are broken down into interest and principal instalments.
- Otherwise, you may have to compute your taxes yourself and claim any refunds when filing your taxes. If there is tax due, you may have to deposit the dues on your own. (Keep in mind that income from the vacant plot is taxable under the head).
- You are not required to submit these documents to anyone, including the IT Department if you are self-employed or a freelancer. You’ll need them to determine your quarterly advance tax liability. You must keep them safe to respond to IT Department questions and for your records.
Points To Be Considered While Computing Income From House Property
Read: Ways to Verify Your Tenant
What are the conditions for taxability of “Income from House Property”? – is a common question that is asked. Listed below are points to help you with the income from house property problems and solutions.
- The property’s NAV is used to compute the tax.
- If the taxpayer’s house is empty for a length of time and then rented out, the Income from House Property computation should be done only for the rent received, not for the entire year.
- If a taxpayer’s house is vacant for the entire year and he or she is living in another city owing to a job but is still paying municipal taxes, this can be deducted from other income earned during the year.
- Become co-owners: If an individual and his or her spouse have taken out a home loan together, both can claim a tax deduction for principal and interest payments.
- If the assessee already has one property registered in his or her name, it is a good idea to register the second property in the name of the assessee’s spouse or relative to avoid paying too much in taxes.
- Multiple property ownership: According to the Income Tax Act of 1961, if a person owns multiple dwelling properties, only one of them is considered self-occupied. The taxpayer must assess the tax due on all of his or her properties and occupy the one with the highest tax liability while renting out the rest.
Calculation of Income from House Property
The final income earned from the house property is the amount of the sum of municipal taxes, 30% of the Net Annual Value (Gross Annual Value – Property Tax), and the home loan interest subtracted from the gross annual value derived. This income is taxed according to the relevant slab rate.
What is Self-Occupied Property?
If the house property owned by the assessee is used for his/her residence throughout the year, it would be termed as self-occupied property. In case the taxpayer is residing in some other region due to personal or employment issues, while the property is being used by his/her spouse, parents, or children, it would still be considered self-occupied property.
How is the Tax Liability of a Self-Occupied House Property Fixed?
Income from self-occupied house property is zero and this results in a loss for the homeowner due to the amount of loan repayment and property tax repayment. Under Section24(b)of The Income Tax Act, tax exemption on home loan interest for a self–occupied property is up toRs.2lakh. Under section 80(C), tax exemption on home loan principal amount is up toRs.1.5lakh.
Tax Calculation of Self-Occupied House Property
| Particulars | Amount |
|---|---|
| Gross annual value (GAV) | Nil |
| Reduce from GAV the municipal tax to obtain the net annual value (NAV) | Nil |
| NAV | Nil |
| Deductions Available | |
| Standard deduction of 30% on NAV under Section 24(a) | Nil |
| Deduction of up to Rs 2 lakh on home loan interest paid | Rs 2 lakh |
| Loss from House Property | Rs 2 lakh |
How Many Properties can be Declared as Self-Occupied?
According to the Interim Budget-2019, the owner can declare any 2 of his/her properties self-occupied. The choice of any 2 properties is left to the taxpayer. The remaining properties will be considered rented out for income tax computation. However, for the home loan interest payment, the tax deduction would be Rs 2 lakh as stated in section 24(b). Similarly, for home loan principal amount repayment, the tax deduction would be Rs 1.5 lakh as stated in section 80(C). Know more about the Principal Amount of a Home Loan from here.
How to Set off Losses from House Property?
Just owning the property is not enough to make a profit. One must also consider various circumstances under which the house property may put the taxpayer in a situation of loss. Such instances occur when the property is self-occupied, and the gross annual value generated is nil. Also, if the property is rented out but still does not earn enough to cover home loan repayment or property tax, a substantial amount of loss could be generated for the homeowner.
To provide security against such scenarios, Section 71 of the Income Tax Act allows the set-off of losses incurred from house property to be classified under other heads such as income from salary, income from other sources, profit and gains of business and profession, and capital gains. The losses that remain unadjusted under other heads could be moved ahead for 8 years after the loss is incurred. After the 8 years are over, the loss can only be adjusted under the head of income from house property.
According to the budget of the financial year 2017-18, the amount of set-off against other heads could be a maximum of Rs.2 lakh for both self-occupied and rented house properties.
How to Claim Losses if the Property is Jointly Owned?
If the house property for which the home loan is being paid is co-owned, the tax deductions will be applicable in proportion to the part of the property owned. However, both the co-owners need to be co-borrowers in the home loan.
Each owner can claim Rs.2 lakh tax deduction under Section 24(b) and Rs.1.5 lakh tax deduction under Section 80(C). If the taxpayers are first-time homeowners, they are eligible for tax exemption under Section 80EE or Section 80EEa.
Real estate investments are considered highly profitable due to the increasing value of the land. However, owning a house property might require a bit of financial and legal knowledge to be made profitable. The amount of money earned from house property by renting it out is considered under the head Income from house property. This income is taxable according to the Income Tax Act. In case the property is occupied by the owner or his/her family themselves, the gross annual income turns out to be nil. In such a case, the homeowner is allowed a certain amount of tax relaxation considering the burden of home loan repayments and property tax. In case the property is let out, the amount of rent received is taxable as per the law. However, it is not unusual to be confused in the matters of Income Tax when there are a lot of sections to refer to and a lot of calculations to be made. To find out the best method of tax computations and the exact amount of profit or loss incurred due to house properties, NoBroker Legal Services. In case you are planning to purchase a house for self-occupancy or renting out, get in contact with professionals at NoBroker to get a reasonable quote. You will find new houses, resale houses, projects still under construction, and more! The options are endless and all of them come with zero brokerage.
FAQ’s
Q1 What is the Net Annual Value of house property?
Ans. The net Annual Value of a house property is the amount obtained after subtracting municipal taxes from the Gross Annual Value
Q2 If I miss the deadline for filing a return, will my losses of the financial year be carried off to the next year?
Ans. Every taxpayer is supposed to file returns by the date 31st July. In case the returns are not filed by then, the losses incurred do not get carried off to set off in future years. However, if these losses are incurred from house property, the losses incurred can be carried forward for future years.
Q3 If my house property is let out for a 6-month duration and left vacant for the rest of 6 months, how will the gross annual value be calculated in such a case?
Ans. In case the actual rent received was less than the expected rent for the entire year, the actual rent collected will be the gross annual value.
Q4 How much of your rent is tax-free?
Ans. If the rent exceeds Rs 1 lakh, the individual can claim HRA tax benefits.
Q5 What is a self-occupied house?
Ans. Self-occupied property is defined as a home that is used by the owner throughout the year. As a result, a property that is not used by the owner as his primary residence cannot be classified as self-occupied.
