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Udeetta Sarma

October 1, 2024

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‍Income from House Property: Taxes & Exemptions

Representation of a financial institution, and it is true for many Indians that people own real estate even for residential or investment purposes. But have you ever thought of the property tax or income tax from house property on any residential premises? Knowing how income from house property is taxed, how it is calculated, and what types of exceptions there are can help property owners learn some lawful ways and techniques to avoid tax liabilities better.

In this blog, we will discuss the identification of income from house property, which properties are taxable under the "income from house property," who owns these properties, and the deductions and exemptions available to the owner for tax payments.

What is Income from House Property?

Income from house property means making money through rent or deemed income of real estate such as a building, home apartment and land attached to a building taxable which is levied to tax under the Purview of Income Tax Act in India This provision is meant to tax the rental income a property is capable of earning, even though that potential may not be realised (self-occupied cases). This taxation is applied regardless of whether you receive rental income or not, such as specific property type.

Types of House Property

For calculations and taxability of income from house property, we need to divide properties into two main categories:

1. Self-Occupied Property (SOP):

Self-owned property: A self-occupied property is one that the owner uses as their residence. These use cases do not produce actual rental income. However, there is still an assessment of the income that could be earned through rent even where a property does not generate any.

Tax Treatment: Self-occupied property is treated as nil annual value. However, interest paid on your home loan for such property can still be claimed as a deduction, up to ₹2 lakh per annum under Section 24(b) of the Income Tax Act.

2. Let Out Property (LOP):

Let-out property refers to real estate, which is given on leases to tenants. This is where the real rental income flows in and has to be reported as such for tax purposes.

Tax Treatment: Rent received from tenants is the annual value of the property. This rental income must be included in the property owner's tax return.

If a taxpayer owns more than one self-occupied property, they can select one as their self-occupied property and the others will be considered as deemed to have been let out ( read: taxable) even if no rent is received. That is, they would be taxed on those properties based on an assumed income.

Computation of Income from House Property

The computation of income from house property is a straightforward process, but it involves several components. Here’s a step-by-step explanation:

1. Gross Annual Value (GAV):

The first step is determining the Gross Annual Value of the property. The GAV is the higher of:

- The actual rent received, or

- The reasonable rent the property might fetch based on market rates (known as "expected rent").

In the case of self-occupied property, the GAV is nil.

2. Municipal Taxes:

The Net Annual Value is calculated by deducting the municipal taxes, if any (property tax) paid by the owner, from the Gross Annual Value. But it is also to be noted that this deduction is applicable only when these taxes are paid during the financial year. Except for unpaid loans, no deduction is allowed.

3. Standard Deduction (30%):

Thereafter, a regular deduction of 30% of the Net Annual Value is sanctioned under Section 24(a) to meet repairing and maintaining costs. You can deduct this 30% even if your expenses for repairs or maintenance come in under or exceed that amount.

4. Interest on Home Loan (Section 24b):

Interest that is paid for taking a Loan for the acquisition, construction or renovation of the property is allowed to be deducted from the income from the house property. The limits are:

-Up to ₹2 lakh for self-occupied properties

-Full interest amount with no upper limit for let-out properties (subject to certain conditions)

5. Final Taxable Income:

The last taxable salary = Gross Annual Value — (less: municipal taxes, standard derivation and intrigue on home advance).

Speaking of taxes, if you are confused between the old and new tax regime, our blog on Old vs new tax regime: Which One Should You Choose? Might help you

How to Calculate the Gross Annual Value of the Let-out Property?

For properties that are either let out or deemed let out, the Gross Annual Value (GAV) needs to be calculated in a specific manner. When a property is let out for the entire year, the GAV is determined as the higher of two values:

1. Expected Rent (ER):

This is the higher value between the municipal valuation and the fair rent, but it is capped by the standard rent. The expected rent shall not exceed the standard rent but may be less than the standard rent. But it may also be more than either the fair rent or the municipal value in some conditions.

For example, let’s consider a scenario involving a property owned by Nikhil, which is rented out. We need to determine the Gross Annual Value (GAV) based on the following information:

Municipal Value: ₹85,000

Fair Rent: ₹95,000

Standard Rent: ₹80,000

Actual Rent Received: ₹78,000

Solution:

Particulars	Amount
1. Municipal Value	₹85,000
2. Fair Rent	₹95,000
3. Higher Municipal Value and Fair Rent	₹95,000
4. Standard Rent	₹80,000
5. Expected Rent (Lower of Fair Rent or Standard Rent)	₹80,000
6. Actual Rent Received	₹78,000
7. Gross Annual Value (Higher of Expected Rent and Actual Rent Received)	₹80,000

Explanation:

1. Compare the Municipal Value (₹85,000) and Fair Rent (₹95,000). The higher value is ₹95,000.

2. Now, compare the higher value (₹95,000) with the Standard Rent (₹80,000). Since Expected Rent cannot exceed the Standard Rent, the Expected Rent is ₹80,000.

3. Finally, compare the Expected Rent (₹80,000) with the Actual Rent Received (₹78,000). The GAV is the higher value, which is ₹80,000.

Note: If the property falls under the Rent Control Act, the expected rent is restricted to the Standard Rent, which is the maximum permissible rent recoverable from the tenant.

2. Actual Rent Received or Receivable During the Year

The difference is that Actual Rent includes rent received or collectable over a year (even during periods when the property may be vacant). But in some circumstances, the unpaid rent can be reduced from the actual rent receivable provided certain conditions are satisfied. These conditions are:

1. The rental agreement is real

2. The tenant either moved out or eviction proceedings are underway.

3. The tenant must not occupy any other property owned by the landlord

4. The landlord has attempted to collect the unpaid rent either through legal means or has provided documentation detailing that such action would likely be ineffective.

House Property Income Calculation Format:

Particulars	Amount (₹)
Gross Annual Value (GAV)	XXXX
Less: Municipal Taxes Paid During the Year	(XXXX)
Net Annual Value (NAV)	XXXX
Less: Deductions
- Under Section 24(a): 30% of NAV	(XXXX)
- Under Section 24(b): Interest on Borrowed Capital	(XXXX)
Income from House Property	XXXX

Example: House Property Tax Calculation

Suppose Nikhil owns a let-out property with:

Gross Annual Value (GAV) = ₹1,20,000

Municipal Taxes Paid During the Year = ₹20,000

Interest on Borrowed Capital = ₹25,000

Solution:

Particulars	Amount (₹)
Gross Annual Value (GAV)	1,20,000
Less: Municipal Taxes Paid During the Year	-20,000
Net Annual Value (NAV)	1,00,000
Less: Deductions
- Under Section 24(a): 30% of NAV	-30,000
- Under Section 24(b): Interest on Borrowed Capital	-25,000
Income from House Property	45,000

Explanation:

Net Annual Value (NAV) is ₹1,20,000 (GAV) - ₹20,000 (Municipal Taxes) = ₹1,00,000.

Deduction under Section 24(a) is 30% of ₹1,00,000 = ₹30,000.

Interest Deduction under Section 24(b) is ₹25,000.

Income from House Property is ₹1,00,000 - ₹30,000 - ₹25,000 = ₹45,000.

This ₹45,000 is the income from the house property that will be subject to tax.

Exemptions and Deductions on Income from House Property

There are many deductions and exemptions under the Indian Income Tax Act to exempt or reduce your taxable income from house property. The availability of these exemptions allows taxpayers to effectively control their tax obligations as they hold residential or business properties.

1. Section 24 (b) – Home Loan Interest :

You can claim the deduction of the interest paid on the home loan by you as mentioned earlier. In the case of a self-occupied property, the maximum an investor can claim as a deduction is ₹2 lakh, which is conditional to the construction/acquisition being completed within five years from the end of the financial year in which that loan was taken. For set off and carry forward of loss from rented property, the entire interest is tax deductible in case of let-out properties.

2. Section 80EEA – Deduction on Home Loan Interest

First-time homebuyers could claim an extra deduction for the interest paid on home loans - up to ₹1.5 lahks under Section 80EEA (over and above the standard ₹2 lahks under Section 24(b)). However, the deduction is allowed only for loans taken between April 1, 2019 and March 31, 2022, on properties not exceeding ₹45 lakh.

3. Deduction on Principal Repayment:

Principal repayment of a home loan is eligible for deduction up to ₹1.5 lakh under Section 80C of the Income Tax Act. This deduction is available for self-occupied as well as let-out property owners.

4. Pre-construction Interest:

For instance, in case the loan is taken for the construction of a house then even the interest paid before finishing the construction can be claimed as a deduction. Pre-construction interest is deductible in five equal instalments from the year of completion of

Special Considerations for Jointly Owned Properties

When the owner of a house property is in joint ownership, then income from the house property will be taxed depending upon the percentage shareholding of each co-owner in the Property. Every co-owner can separately assert deductions on his portion of the income as well as on that part of the interest paid on home loans.

You might also be interested in our blog A Simple Guide on How to Claim TDS in India.

Conclusion

In India, there are lots of property owners whether they have self-occupied houses or let-out houses who must know small nuances related to the income from house property. House property taxes are calculated on the Gross Annual Value with some deductions that help to lower the amount of income that gets taxed. Deductions like the mandatory 30% repairs, home loan interest and deductions under Section 80C and 80EEA offer big sops to property owners.

The Indian Income Tax Act has special provisions to deal with cases where an individual resides in one house (for which HRA is paid), but owns multiple properties, or where the property in question has been jointly owned with others. If taxpayers grasp these rules and use them correctly, they can reduce their taxes and take full advantage of the legal exemptions and deductions.

So tax planning and effective property management can work in such cases to take home all returns from your real estate investment while not being an unworthy citizen of the universe by fulfilling all tax obligations — transparently.

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FAQ

1. What is income from house property?

Income from house property refers to the rental income you earn from your property or the notional income deemed from self-occupied or let-out properties, which is taxable under Indian tax laws.

2. How is the income from the let-out property calculated?

The income is calculated by subtracting municipal taxes, a 30% standard deduction, and home loan interest from the gross annual value (total rent or potential rent).

3. What deductions can I claim for a self-occupied house?

For a self-occupied house, you can claim up to ₹2 lakh on home loan interest under Section 24(b), plus other benefits under Section 80C for principal repayment.

4. Can I claim deductions on pre-construction home loan interest?

Yes, pre-construction interest can be claimed in five equal instalments starting from the year construction is completed.

5. What happens if I own multiple properties?

If you own more than one self-occupied property, only one can be treated as self-occupied, while the others will be considered let-out, and notional rental income will be taxed.

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