What is a house property as per the Income Tax Act?
A home, an office, a shop, a building or some land attached to the building for example a parking lot qualifies for house property. All types of properties are taxed under the head ‘income from house property’ in the income tax return, and the income tax act does not differentiate between a commercial and residential property.
Who is an owner of a house property?
The owner of a house property who can file income tax return is the legal owner, someone who can exercise the rights of the owner in his own right and not on someone else’s behalf.
What does a self-occupied house property mean?
A self-occupied house property is used for one’s own residential purposes. It can be occupied by the taxpayer’s family – parents and/or spouse and children. A vacant house property is considered as self-occupied for the purpose of Income Tax.
If more than one self-occupied house property is owned by the taxpayer, only one is considered and treated as a self-occupied property and the rest of them are assumed to be let out. The choice of which property to choose as self-occupied is up to the taxpayer.
What does a let out house property mean?
If you have rented out your house for whole or part of the year, it is considered to be a let house property.
Taxability of Rental income
Income from a Self-occupied or a let out house is computed in the manner explained below.
It is also pertinent to note that If an individual uses a property for the purpose of business or profession or for carrying out freelancing work – it is taxed under the ‘income from business and profession’ head. Expenses incurred on repair and maintenance of house property are taken as business expenditure.
Computing the taxable rental income
Manner of computing taxable rental income for a self-occupied house and a house which is let out is similar, still there are few differences. Let’s see how it is done
Steps to calculate taxable rental income
1. Determining gross annual value of the property (GAV)
Gross annual value is the annual amount for which the property would be let out. In other words, it is the estimated rent that you could get if the house was rented out. It is generally taken as higher of actual rent and expected rent.
For a self-occupied house Gross annual value would be zero.
2. Reduce municipal taxes paid
Next we reduce GAV by the municipal taxes which are paid by the owner of house during the year. It should be noted that municipal taxes which are due but not paid within the year should not be deducted
3. Net Annual Value
It is the resultant of Gross annual value reduced by municipal taxes
4. Standard deduction of 30 % from the NAV
A standard deduction of 30 % from NAV can be done under section 24 of Income tax act. This deduction is for expenses such as painting, repairs etc. This is a fixed deduction and therefore no further amount should be deducted.
5. Reduce interest on house loan
If you have taken a loan for acquiring, constructing, renewing a house, interest payable on such loan can be subtracted
6. Income/ Loss from house property
The resultant value after reducing the interest is your income/loss from house property.
Saving tax on House property income
Through interest on housing loan
- Interest on original loan: on loan taken for purchase, construction, repair, renewal of house which would be self occupied by you, interest on loan up to 200000 is deductible, while for a let out property there is no limit on interest deductions. This deduction is available even if the interest is not paid during the year, only the interest must accrue during the year.
- Interest on fresh loan to repay original loan: Even interest on a fresh loan taken to repay the original house loan is also deductible.
- Pre- construction Interest: Interest payable in respect of funds borrowed for acquisition or construction of a house property which is pertaining to the period prior to financial year in which the property is acquired or constructed is also eligible for deduction in 5 equal annual instalments starting from the financial year in which house is acquired or constructed
Additional deduction of interest under section 80 EE for first time home owners for loans sanctioned during FY 13-14 and 16-17
An additional deduction of interest up to 100000 is available for first time house buyers if the following conditions are met
- The loan in sanctioned during the financial year 2013-14
- Amount of loan sanctioned is up to 2500000
- The value of residential house property is up to 4000000
This deduction is available for AY 2014-15, where the interest payable during AY 14-15 is less than 100000, the balance amount can be deducted in AY 15-16.
And here’s the good news again, the additional interest deduction of 50000 is again available for first time home buyers and this time limits have been escalated:
- The loan in sanctioned during the financial year 2016-17
- Amount of loan sanctioned is up to 3500000
- The value of residential house property is up to 5000000
Note: This deduction is not available for loans sanctioned during FY 14-15 and 15-16
Through deduction of repayment of House loan instalments under section 80 C
The payment of any instalment in respect of a housing loan taken from specified agencies qualifies for deduction under section 80 C. This can help you reduce your income by up to 1500000
Doubling the interest deduction through co-owners taking a joint loan
If the property is jointly held, then deductions can be availed by each co-owner based on the respective shareholding in proportion mentioned in the purchase deed or agreement.
The interest deduction of 200000 under sec 24 in respect of a residential self occupied property is available separately for each co-owner, this way you can take an interest deduction of 4000000!
Also deduction for repayment of housing loan under section 80 C is available separately for each co-owner.
Set off and carry forward of Losses under House property
Adjustments within the financial year (Set off)
Loss from a house can be adjusted against income from any other house
Loss under House property can be adjusted against income under any other head of income
Adjustments in the coming financial years (Carry- forward)
Unadjusted loss from house property can be carried forward for 8 subsequent years and adjusted against income under house property in future years.