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 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.
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.
The table given below shows how you can calculate Income from House Property:
|Gross Annual Value||xxx|
|Less: Municipal taxes||(xxx)|
|Net Annual Value||xxx|
|Less: Deductions u/s 24
Deduction on interest paid
|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.
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 but may or may not be the registered owner of the property.
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 u/s 24
1) Standard deduction of 30% of annual value
2) Interest paid on home loan
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.
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.
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.
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 u/s 80C of the Income Tax Act.
The maximum tax deduction allowed u/s 80C is Rs 1,50,000. The tax deduction on principal repayment is also a part of the various deductions allowed u/s 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.
The amount paid as stamp duty & registration fee is also allowed as a tax deduction u/s 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.
Certain conditions must be satisfied to claim deduction u/s 80C for principal repayment of home loan:
If you have claimed the deduction u/s 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.
Just like the deduction u/s 24, deductions 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.
The 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.
The eligibility of the home loan borrower depends on the following points:
The deduction under section 80EE is allowed in computing the total income of the individual for the assessment year beginning on the 1st day of April, 2017 and subsequent assessment years. You will also need a document from the lender specifying the interest and the 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.