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Income From House Property & Taxes: How to Calculate Income From House Property

What is “Income from House Property”?

To make the process of calculating taxes easier, the Income Tax Act has separated an individual's income into different categories. "Income from House property" is one of these headings. Income from House Property refers to the revenue derived from owning a property. Rent received from a house property owned by a taxpayer that is rented out is taxable.

You can refer to your home, office, building, or store as house property. All of the income from these kinds of properties—residential or commercial—is subject to taxes. The property is taxed under income from house property if it is used for residential purposes. However, it is regarded as income from a business or profession if the property is used for such purposes.

Update on the 2023 budget: The way capital gains on the sale of a residential property are computed has been altered by the government. Any home loan interest that the seller claims to be deductible from income taxes during the property's holding term is not included in the cost of purchasing the property. If it is suggested to exclude the interest that was previously claimed as a deduction from the acquisition cost when calculating capital gains. Taxpayers who intend to sell their residential property in the future may be impacted by this.

What are the conditions for taxability of “Income from House Property”?

Only when the income from your house property satisfies three fundamental requirements is it added to your gross total income.

  1. You are the owner of that property.
  2. Property consists of any buildings and/or land. The building can be a residential house, factory building, shop, office, etc.
  3. The property is used for any purpose except by you(owner) to run your business or profession.

Important note: The rent from the undeveloped land is regarded as additional revenue.

Types of House Property under Income Tax

For taxation purposes, the term "house property" under the Indian Income Tax Act includes a variety of properties. The following categories of residential real estate are eligible for income tax in India:

  1. Self-Occupied Property: This is a reference to a home that is utilized exclusively for residential use. For taxation purposes, a single self-occupied property owned by an individual is considered to be that property. In these situations, individuals are eligible to deduct the interest paid on their home loan, up to a certain amount, and their notional rental income is not taxed.
  2. Let-Out Property: A property that is leased or rented to a third party is known as a let-out property. Such a property's rental income is subject to taxation under the heading "Income from House Property." Tax deductions are available to individuals for interest on home loans, standard deduction (30% of net annual value), and municipal taxes paid.
  3. Deemed to be Let-Out Property: This group includes homes that the tax authorities consider to be let-out even though they aren't actually rented out. It usually includes properties that the owner does not live in because of work, a business, or other circumstances. In this instance, the interest on house loans and municipal taxes can be deducted, and the notional rental income is regarded as taxable.
  4. Under Construction Property: For taxation purposes, properties that are either under construction or not yet ready for occupancy are also taken into account. People cannot claim rental income in these situations because the property is not rented out. However, based on the actual usage or rental arrangement, the appropriate treatment (self-occupied or let-out) will be decided upon once the construction is finished.

How to calculate Income from House Property for income tax purposes?

The income tax divides your income into two groups based on whether it is taxable as house property income.

 

Self-Occupied House Property

Property of this kind is self-owned and is utilized for residential purposes. This could be occupied by the owner or their family. For income tax purposes, an empty property is regarded as a self-occupied property. Prior to the 2019–20 fiscal year, only the taxpayer's primary residence is regarded as self-occupied; all other properties are presumed to be rented out. Two properties are regarded as self-occupied properties as of 2019–20.

Let Out House Property

For income tax purposes, any residential property that is rented out entirely or in part during the year is referred to as a let-out property.

Note: Inherited Property: Based on the aforementioned usage, any property inherited from parents, grandparents, etc., may be classified as either self-occupied or rental property.

Also, discuss Deemed to be let out. That if you own more than 2 house properties, then even if it is not let out, it will be deemed as let-out property.

Let’s understand the steps for the calculation of Income from House Property.

Steps to compute “Income from House Property”

Calculations of Income from House property

Gross Annual Value

 

Less: Municipal Taxes

 

Net Annual Value

 

Less:Deductions Under Section 24

 
  • Standard Deduction@30%
  • Interest Paid on Borrowed Loan
 

Income From House Property

XXX

 

(XXX)

 

XXX

 

(XXX)

 

(XXX)

(XXX)

 

XXX

 

  1. Determining Gross Annual Value (GAV) of the property:
 

Any property that is used for personal use has no gross annual value. On the other hand, the rent received for the same residential property represents the gross annual value of a let-out property.


 
  1. Reduction of Municipal Taxes(property tax):
 

The amount of the property tax that has been paid may be subtracted from the property's gross yearly value.

  1. Determination of Net Annual Value (NAV):
 

The Net Annual Value is obtained by subtracting the property tax from the Gross Annual Value.

  1. Reduction of standard Deduction @30% of Net Annual Value:

The Income Tax Act permits a deduction of 30% of the Net Annual Value as a rebate from the NAV. Under the Act, no further costs for painting, rebuilding, or repairs can be deducted from taxes after 30%.

  1. Reduction of home loan interest:
 

According to section 24 of the Income Tax Act, the interest paid on the house loan taken out during the fiscal year must be subtracted.

  1. Final Determination of Income from House Property:

The income you receive from the house property represents the ultimate value. The tax rate on this depends on your income slab.

  1. Loss from house property:
 

If someone has a self-occupied home that was bought with a loan, they will not be able to deduct the interest paid on the loan since their home's gross annual value will be zero. The income from other heads can be used to offset this loss.

Important note - The rental value of the let-out property is equal to its gross annual value. In these situations, the rental value ought to exceed or be equivalent to the reasonable rent that the municipality determines for the property.

Calculation/Assessment of “Income from House Property” in both cases – Self-occupied and Let Out

Type of House Property

Self-Occupied Property

Let Out Property

Gross Annual Value

 

Less: Municipal Taxes/ Taxes paid to local authorities

 

Net Annual Value

 

Less: Deductions under section 24

 
  • Standard Deduction
 
  • Interest paid on Home Loan
 

Income from House property

Nil

 

Not Applicable

 

Nil

 

Not applicable

 

Limit to Rs 2 Lakh per annum

 

XXX

XXX

 

XXX

 

XXX

 

30% of NAV

 

No limit

 

XXX

Important Note: From the F.Y. 2017-18, set of loss of income from house property from other sources of income is restricted to Rs. 2,00,000.

How to calculate the Gross Annual Value of a House Property?

Assessment of Gross Annual Value of Self-Occupied House Property:

If the individual occupies the only property they own, the annual value will be zero. Only two properties are regarded as self-occupied if the owner owns multiple properties for that purpose; in this case, the properties' annual value can be set to zero. The remaining properties' yearly value will be determined by calculating the expected rent in the event that the property is deemed to be rented out.

Assessment of Gross Annual Value of Let-Out House Property:

Step 1:

 

Find out the Reasonable Expected Rent of the Property (A)

The amount that can be expected to be paid for the property each year is known as the Reasonable Expected Rent. It is more than the property's fair rent or municipal valuation, but it is limited to the standard rent set by the Rent Control Act. Subject to the maximum Standard Rent, Reasonable Expected Rent is the higher of Municipal Valuation or Fair Rent.

Step 2:

 

Find out the Actual Rent Received or Receivable (B)

Step 3:

 

Higher of (A) or (B), is the Gross Annual Value

Important terminologies related to “Income from House Property”

Municipal value

The municipal authorities determine the value of the house property in order to impose municipal taxes.

Fair rent value

It is the appropriate rent that can be asked for in the same neighborhood for a comparable property with the same features.

Standard rent

According to the Rent Control Act, this is the rent. The Rent Control Act prohibits the property owner from charging more than the minimum rent.

Net Annual Value (NAV)

It is the value calculated as Gross Annual Value minus Municipal taxes paid.

Deductions

These are the refunds that the taxpayer receives in exchange for their investments. To determine the actual taxable income, these are subtracted. The Income Tax Act of 1961's section 24 permits the taxpayer to claim these deductions.

What are the Deductions for the calculation of Income from House Property?

Section 24 of the Income Tax Act specifies the deductions under the heading Income from House Property. They are

Standard Deduction: 

30% of the Net Annual Value may be deducted for things like rent, repairs, and other expenses (regardless of the actual expenses incurred). This deduction is not applicable in the event that the Gross Annual Value is zero.

Home Loan Interest: 

Under this section, you can deduct interest paid on home loans taken out for acquisition, building, reconstruction, and repair.

How to Calculate Income for Self Occupied house property?

When an assessee owned multiple residential properties prior to Budget 2019, only one of those properties was regarded as self-occupied and the other as let-out. Following the 2019 Budget, an assessee is only allowed to own two self-occupied homes; any additional homes are deemed let out. Prior to moving on, the following self-occupied scenarios need to be covered:

Property used for business and profession: If the property is utilized for business purposes only and not for residential ones, rent expenses related to house property will not be allowed under the heading "Income from business and profession," and no income will be taken into account under that heading either.

Provided to employees as residential quarters: The property is regarded as a part of the business if it is furnished to the employees as quarters; however, if any rent is collected from the employees for this use, it will be subject to business and profession taxes.

Example for Calculation of Income from Self-Occupied House Property

Let's look at an example to better understand how income is calculated for self-occupied properties:

Mohan owns a house property with a municipal value of INR 2,50,000 and pays INR 53,000 in municipal taxes. Mohan is making interest payments of INR 2,88,000 on his home loan. Calculate Mohan's income.

Solution

Particulars

Amount(Rs.)

A.Gross Annual Value (for self-occupied properties, GAV is considered NIL)

NIL

B.Less: Municipal Taxes (For self-occupied, municipal taxes are considered)

NIL

Net Annual Value (A-B)

NIL

Less : Interest on home loan As per section 24, interest is restricted to INR 2 lakh)

(2,00,000)

Income from House Property

(2,00,000)

How to Calculate Income from Let-Out House Property?

If the assessee owns more than one home (for FY2022-23), two of those homes are regarded as self-occupied, and the remaining homes are regarded as let-out properties. Now let's look at a case study on figuring out how much money deemed let-out properties bring in.

Example for Calculation of Income from Let-Out House Property

Sita is the owner of a home that is rented out all year long. The amount received as actual rent is INR 1,15,000, while the municipal value is INR 1,45,000, fair rent is INR 1,36,000, and standard rent is INR 1,24,000.The tenant has paid INR 5,400 in municipal taxes. Interest paid of INR 3,50,000 on a home loan. Also, Sita makes INR 7,12,000 from her business.

Compute net income of sita from house property.

Solution:

Particulars

Amount(Rs.)

A.Gross Annual Value Reasonable Rent: (A) 1,24,000 Higher of MV and FR 1,45,000 Maximum to Standard rent i.e. 1,24,000

Actual rent received: (B) 1,15,000

GAV is higher of A and B

1,24,000

B.Less: Municipal Taxes (In case of deemed let out, municipal taxes can only be claimed if paid by the owner and here, the tenant has paid)

NIL

Net Annual Value (A-B)

1,24,000

Less : Interest on home loan

(3,50,000)

Income from House property

(2,26,000)

Less: Set off from Business income (restricted upto INR 2,00,000)

2,00,000

Net Income From House property

(26,000)

What are the Tax Benefits on Home Loan?

  1. Tax Deduction on Home Loan Interest: Section 24: Any interest paid on a home loan may be deducted under section 24 of the Income Tax Act, 1961, but only up to Rs. 2 lakhs for properties that are used for self-occupation. Pre-construction and post-construction periods are the subcategories into which the interest is divided.
  2. Tax Deduction on Principal Repayment : Section 80C allows for a deduction of up to INR 1,50,000 from the principal amount of a home loan in a single fiscal year.
  3. Additional tax deduction under Section 80EEA: New section 80EEA was added to the 2019 budget to give home buyers with property up to Rs 45 lakhs additional tax benefits on interest paid on home loans up to INR 1.5 lakhs. This deduction is in addition to the one allowed by section 24.

What are the income tax deductions on home loans for Joint Owners?

A.Neither Co-owners nor co-borrowers

  • The taxpayer can claim a deduction of up to Rs 2 Lakh on home loan interest in two cases:
  1. The property is occupied by the owner themselves, or
  2. if the home is empty.
  3. The whole amount of the home loan interest is deductible from taxes if the property is rented out.
  • Taxes can be saved up to Rs. 1,50,000 within the overall limit under Section 80C during repayment on the principal amount of the loan.
  • A few conditions on which this deduction can be claimed are:
  • The loan must be availed for the construction of purchase of the new house property.
  • Till five years from the time of possession, the property should not be sold off.
  • Under Section 80C, direct deductions for stamp duty, registration fees, and other associated costs are permitted up to a total of Rs. 1.5 lakh. You may make a claim for this in the year that you pay for it.

B.Co-owners and co-borrowers

  • When co-borrowers of a self-occupied home loan are also co-owners of the property, they can each deduct up to Rs. 2 Lakh in interest from the loan (as long as the interest on the loan is greater than Rs. 400000).
  • Under Section 80C, they are each eligible to deduct up to Rs. 1.5 lakh in principal repayments, stamp duty, and registration fees. The percentage of each benefit deducted will match the proportion of each owner's share of the property.

C. Co-borrowers, not co-owners

  • A person who is only a co-borrower and not the owner of the property is not eligible to receive interest on the home loan that has been paid back.
  • One is not eligible for any benefits related to principal repayment, stamp duty, etc. if he is not a co-owner of residential property.

D. Co-owners not co-borrowers

  • One person does not have the right to receive interest on a home loan that has been paid back if they are only co-owners of the loan and not co-borrowers of the property.
  • Under Section 80C, everyone is eligible to deduct stamp duty and registration fees up to a total of Rs. 1.5 lakh. The percentage of each benefit deducted will match the proportion of each owner's share of the property.

E. Tax deductions for Homeowners who own property for the first time

  • An additional tax benefit of up to Rs.50,000 can be claimed by homeowners on interest on a home loan

under section 80EE

Note - This benefit is not availed for an under-construction property.

How to Save Tax on Income from House Property?

Property taxes can be very difficult to pay. Careful planning is necessary to prevent significant taxation. There are many strategies to reduce your income from house property taxes. These are:

Become co-owners

The taxpayer and their spouse or another person may be eligible for a tax exemption on the interest and principal payments made on a joint home loan.

Planning a second home

It is usually a better idea to register another property in the name of the taxpayer's spouse or any other relative if the taxpayer already has one property registered in their name. In this manner, one can prevent paying too much in property taxes.

Joint ownership

If the property is owned by multiple people, co-owners can split the Income from House Property tax to reduce the burden on one person.

Vacant houses

Owner-occupied residential properties are still subject to fair rental value taxes. Thus, it is usually a good idea to rent out any or all vacant properties as this will generate income and prevent any tax-related losses.

Ownership of multiple properties

Should a taxpayer possess multiple properties, only two residential properties may be claimed as self-occupied; the remaining properties will be considered as either let out or let in, depending on the situation. Therefore, it's crucial to assess each property's tax liability, designate the one with the highest tax liability as your home, and rent out the remaining properties. If necessary, self-occupied property can be replaced annually.

The fundamentals of income from house property and tax computation, such as the requirements for taxability, deductions, and strategies for reducing taxes on income from house and property, must have been taught to you. For those without financial experience, tax computation can still be difficult. One can obtain

author

The Tax Heaven

Mr.Vishwas Agarwal✍📊, a seasoned Chartered Accountant 📈💼 and the co-founder & CEO of THE TAX HEAVEN, brings 10 years of expertise in financial management and taxation. Specializing in ITR filing 📑🗃, GST returns 📈💼, and income tax advisory. He offers astute financial guidance and compliance solutions to individuals and businesses alike. Their passion for simplifying complex financial concepts into actionable insights empowers readers with valuable knowledge for informed decision-making. Through insightful blog content, he aims to demystify financial complexities, offering practical advice and tips to navigate the intricate world of finance and taxation.

Frequently Asked Questions

Income from house property includes rental income earned from letting out residential or commercial properties. To calculate income from house property for tax purposes, various deductions such as standard deduction, municipal taxes paid, and deduction for interest on housing loan are allowed.

The key components involved in calculating income from house property include gross annual rental income, deductions allowed under the Income Tax Act such as standard deduction and interest on housing loan, and adjustments for municipal taxes paid.

Gross annual rental income is determined by aggregating the total rent received or receivable by the owner of the property during the financial year.

Standard deduction is a flat percentage deduction allowed from the gross annual rental income to account for expenses such as repairs and maintenance. As per the Income Tax Act, a standard deduction of 30% is allowed on the gross annual rental income.

The deduction for interest on housing loan is allowed on the actual interest paid or payable on the loan taken for the purchase, construction, repair, or renovation of the property. The deduction is subject to certain limits and conditions as per the Income Tax Act.

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