House Property Income and Taxes

Last Updated on Sep 6, 2017

This is a comprehensive guide for those who own a residential property. It will help you in understanding how your income derived from house property is taxed and what are the tax benefits you can avail to minimize your tax liability.

We will talk about tax deductions and calculation of income in 2 different sections. First section will help you understand how your income from house property is calculated and taxed.

Second section will give you detailed information on tax benefits available for those who buy property with home loan.

A) Income from House Property
B) Home Loan Tax Benefits

  1. Tax deduction on payment of home loan interest – section 24
  2. Tax deduction on principal repayment of housing loan – section 80C
  3. Tax deduction for first time home buyer – section 80EE

A) Income from House Property


When an assessee earns any income from a house property, it is taxed under the head 'Income from house property' as per the Income Tax Act. Tax calculation on such income varies depending on the type of house property & several other factors.

Computation of Income from House Property

The table given below shows how you can calculate Income from House Property:


Particulars Amount (Rs.)
Gross Annual Value xxx
Less: Municipal taxes (xxx)
Net Annual Value xxx
Less: Deductions u/s 24
Standard deduction
Deduction on interest paid

(xxx)
(xxx)
Taxable income from house property xxx

Total of income thus obtained from all the house properties owned by you will be treated as income from house property and added to your total income. If the income under the head house property is negative (loss) you can offset that loss against your other taxable income including salary. But Budget 2017 has put a cap of Rs. 2 lakh on the house property loss which can be adjusted against income from other heads in a financial year. So it means that starting 2017-18 you will be able to offset maximum Rs. 2 lakh house property loss against your other income and balance can be carried forward to next 8 assessment years to be adjusted against income under the same head.

To understand how income on house property & subsequent tax on such income is calculated, one needs to gain some knowledge about the following related terms.

Annual value: It is the capacity of the property to earn income.

Municipal value: It is the value of the property as derived by municipal authorities.

Fair Rental Value: It is an assumed rental value of the property which is calculated by comparing it with a similar property having similar features.

Standard rent: It is a fair amount of rent prescribed by Rent control Act which ensures that tenants are not exploited while owners receive a fair amount of rent.

Actual rent received/receivable: It is the actual amount of rent received by the owners from the tenants.

Gross Annual Value (GAV): The one which has highest value among the below three terms is considered Gross Annual Value:

a) Rent received or receivable
b) Fair Market Value
c) Municipal Valuation

If the Rent Control Act is applicable, then the one which has highest value among the below two items is considered Gross Annual Value:

a) Standard Rent
b) Rent Received

Net Annual Value (NAV) is calculated as:

NAV = GAV - Municipal Taxes Paid

Deductions: To calculate the actual taxable income from house property, the following two deductions are allowed under section 24 of the Income Tax Act:

a) Standard Deduction which is 30% of the NAV, is allowed as a deduction towards repairs, rent collection, etc. irrespective of the actual expenditure incurred. This deduction is not allowed if the Gross Annual Value is nil.
b) Interest on home loan is allowed as a deduction under section 24.

Annual Value: Annual Value = NAV Deductions.

Owner/deemed owner:

The person who is entitled to receive the income is called owner of the property while the person who receives financial benefits from the property but is not registered as its owner is called deemed owner of the property. Income from house property is taxable for the person who actually receives monetary benefits from the property who may or may not be the registered owner of the property.

B) Home Loan Tax Benefits


1. Tax Benefit on Interest Paid on Home Loan under section 24 of Income Tax Act


Tax Benefit on payment of interest on housing loan is allowed as a deduction under section 24 of the Income Tax Act. Section 24 of the Income Tax Act states that the amount of interest on housing loan whether accrued or paid, shall be deducted from the Income from House Property. Here, the loan must have been taken for the purpose of purchase or construction or repair or renewal or reconstruction of a Residential House Property.

Two types of deductions are available under section 24


1) Standard deduction of 30% of annual value
2) Interest paid on home loan

Standard deduction:


A tax deduction of 30% of Net Annual Value of the property is allowed to the taxpayer. Net Annual Value is calculated as Gross Annual Value minus Municipal Taxes Paid. This deduction is allowed irrespective of the amount spent on insurance, repairs, water and electricity supply, etc.

Table showing calculation of Net Annual Value of properties:


Let out property Deemed to be let out property Self-occupied property
NAV = Rent received – Municipal taxes paid NAV = Reasonable rent of a similar place – Municipal taxes paid NAV = NIL

Note: Since annual value of a self-occupied property is zero or nil, therefore standard deduction allowed is also zero or nil.

Tax deduction for home loan interest


The maximum tax deduction that you can get here on interest payment of home loan taken for a self-occupied property is Rs. 2 lakhs.

In case the property for which the home loan has been taken is not self-occupied ie. Rented or deemed to be rented, no maximum limit for tax deduction has been prescribed and the taxpayer can take deduction of the whole interest amount under section 24. However, if the owner has not occupied the property himself due to his employment, business or profession carried on at any other place, which has forced him to reside at any other place, then the amount of tax deduction available under section 24 stays limited to Rs. 2 lakhs only.

It is also important to note that this tax deduction of Interest on Home Loan under section 24 is deductible on payable basis, i.e. on accrual basis. Hence, deduction under section 24 should be claimed on yearly basis even if no payment has been made during the year as compared to section 80C (deduction on principal repayment) where deduction is allowed only on payment basis.

The tax benefit under section 24 is reduced from Rs. 2 lakhs to Rs. 30 thousand, if the property is not acquired or construction is not completed within 3 years from the end of Financial Year in which the loan was taken. However, the limit of 3 years has been increased to 5 years from Financial Year 2016-17 and onwards.

Pre-construction interest


Deduction on pre-construction interest is allowed when you have taken a loan for purchase or construction of a house property. However, if the loan is taken for repairs or reconstruction then deduction is not allowed. The deduction for this interest is allowed in 5 equal instalments starting from the year in which the house is purchased or the construction is completed.

Though pre-construction interest is allowed to be claimed as tax deducted in 5 equal yearly instalments which can be claimed beginning the year in which the construction of property is completed, the total amount that can be claimed in a year is subject to a threshold of Rs. 2,00,000 in case of a self-occupied house property.

2. Tax benefit on Home Loan Principal Repayment under section 80C


The amount paid as repayment of principal amount of home loan taken for the construction or purchase of a new house property by an individual/HUF is allowed as tax deduction under section 80C of the Income Tax Act.

Amount of deduction available


The maximum tax deduction allowed under section 80C is Rs. 1,50,000. The tax deduction on principal repayment is also a part of the various deductions allowed under section 80C which includes amount invested in PPF Account, Tax Saving Fixed Deposits, Equity Oriented Mutual funds, National Savings Certificate, Senior Citizens Saving Scheme, etc. The deduction limit of section 80C is inclusive of all these options. This tax deduction is available on payment basis and does not depend on the year for which the payment has been made by the assessee.

Deduction on Stamp Duty & Registration Fee


The amount paid as Stamp Duty & Registration Fee is also allowed as tax deduction under section 80C. This deduction can be claimed whether the assessee has taken a loan or not. You can claim the deduction in the year you incur these expenses.

Conditions for claiming deduction


Certain conditions must be satisfied to claim deduction under section 80C for principal repayment of home loan:

  • You can claim deduction only if the construction of property is complete and you have received a completion certificate for the same.
  • No deduction would be allowed under this section for repayment of principal for those years during which the property was under construction.
  • Deduction is also available whether the property is self-occupied or let out.
  • The benefit can also be claimed for more than 1 house property.

Reversal of tax benefits


If you have claimed the deduction under section 80C, then you should avoid selling the house property in less than five years from the end of Financial Year in which you received its possession. If you sell the property within this time limit then you will not be eligible to claim any deduction for the principal repaid during the current F.Y. and the total amount of tax deduction already claimed in respect of earlier years shall be deemed to be your income of such year in which you sold the property and you will be liable to pay tax on that income.

3. Section 80EE: Deduction for First Time Home Buyers


Just like deduction under section 24, deduction under section 80EE is also available on the interest paid on home loan by taxpayer or assessee. However, unlike section 24, this deduction is only available to first time home buyers. It was first introduced in the Union Budget for Financial Year 2013-14 as a means to help home buyers in the lower income group through tax reliefs.

At that time, the amount of tax benefit given by this section was Rs. 1 lakh which was available to be claimed only once by the first time home buyer.

Revised Deduction Limit


Government reintroduced section 80EE in the Union Budget 2016-17. The quantum of deduction has been changed to Rs. 50,000 for interest paid on home loan. This deduction is available over and above the deduction of section 24 and section 80C which are Rs. 2,00,000 and Rs. 1,50,000 respectively.

Conditions Necessary for Claiming Deduction under Section 80EE:


To claim this special tax benefit, the taxpayer must satisfy the following conditions:

  • The deduction would be available to be claimed from Financial Year 2016 onwards.
  • The deduction can be availed on home loans sanctioned between 1st April 2016 and 31st March 2017 only
  • The value of property for which the loan has been taken should be less than Rs. 50 lakh
  • The home loan amount should not exceed Rs. 35 lakh
  • The tax benefit here can be claimed till the time repayment of loan continues
  • Deduction is only applicable on home loan paid for first house property
  • The property in question can be either self-occupied or non-self-occupied
  • If you claim deduction under this section then you will not be eligible to claim the deduction u/s 24 again for the same amount of interest

Eligibility for Claiming Section 80EE Deductions:


The eligibility of the home loan borrower depends on the following points:

  • The deductions under this section can be claimed only by individual taxpayers on properties purchased either singly or jointly.
  • There are a few types of assessees which are not allowed to claim this deduction like Hindu Undivided Families (HUFs), companies, trusts, Association of Persons (AOP) etc.
  • Section 80EE is applicable on a per person basis instead of a per property basis. So, suppose you have purchased property jointly with your spouse and you both are paying the instalments of loan then you both can individually claim this deduction
  • It is not necessary to reside in the property for which you want to claim this deduction. So, borrowers staying in a rented accommodation can also claim this deduction

How to Claim Section 80EE Tax Deductions:


You can claim this deduction for the Financial Year 2016-17 while filing return by filing the applicable I-T return form and specifying the amount of interest paid in appropriate place. You will also need a document from the lender specifying the interest and principal amount paid that you paid. In addition, you will have to furnish a document from the lender stating the interest and principal amounts on your home loan as well as the amount paid till date.

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