Guide on House Property (Section 22-27)
1. Introduction of House Property
When an individual earns any income from a House Property, such income is taxable under the head ‘Income from House Property’ as per Income Tax Act, 1961. The income received by the landowner from tenant’s for using the property is known as Rental Income. Where, the Property refers to any building including home, office, shop, warehouse etc. and any land attached to the building likewise car parking, garage, compound, etc. Tax calculation on such income depends on the type of house property & several other factors.
When any property is used for the purpose of business or profession, any income from such property is taxed under ‘income from business and profession’. Expenses on the repair and maintenance of it are allowed as business expenditure.
2. Calculation of Income From House Property
Rental Income from House Property
|Gross Annual Value (GAV)||XXX|
|Less: Municipal Tax/ Property Tax||(XXX)|
|Net Annual Value (NAV)||XXX|
|Less: Standard deduction u/s 24 (30% of NAV)||(XXX)|
|Less: Interest on Home Loan u/s 24(b)||(XXX)|
|Income Chargeable under “House Property”||(XXX)|
Let’s understand about the following related terms under House Property Income Computation:
Annual Value: It is the estimated rent that can be earned from the property if the property is let out for the entire year.
Municipal value: It is the estimated rental value calculated by Municipal Corporation for charging municipal taxes.
Fair Rental Value: It is an assumed rental value of the property, which the owner of the property expects to earn.
Standard rent: In the disputed cases, the rent fixed by the court as per Rent Control Act is known as Standard Rent. It is the maximum rent that owner can get through a legal procedure.
Actual rent received/receivable: It is the actual amount of rent received by the owners from the tenants.
Gross Annual Value (GAV):
The highest value among the below three terms is considered Gross Annual Value:
a) Rent received or receivable
b) Fair Market Value
c) Municipal Valuation
Where the Rent Control Act applies then the one which has highest value among the below two items is considered Gross Annual Value:
a) Standard Rent
b) Actual Rent Received
Net Annual Value (NAV) calculation:
NAV = GAV – Municipal Taxes Paid
Deductions: The following two deductions are allowed under section 24 of the Income Tax Act:
a) Standard Deduction of 30%, which is allowed as a deduction towards repairs, rent collection, etc. irrespective of the actual expenditure incurred. This deduction is not allowed in case the Gross Annual Value (GAV) is nil.
b) Interest on home loan is allowed as a deduction under section 24(b).
Municipal Tax – Municipal Taxes are charged on the municipal value of the building and land in the area. If Municipal Taxes are paid by the Landlord on or before 31st March of financial year, then such taxes paid will be allowed to be reduced from GAV.
The person who receives the rental income is called owner of the property, where the person who receives financial benefits but is not an owner of the property is called deemed owner of the property.
Lets understand with the help of an illustration:
3. Tax Benefits on Home Loans
Interest Paid deduction on Home Loan under section 24(b) of Income Tax Act
Payment of interest on home loan is allowed as a deduction under section 24(b) of the Income Tax Act. Section 24(b) states that the amount of interest on home loan whether accrued or paid, shall be reduced 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 u/s 24(a)
2) Home loan Interest paid u/s 24(b).
A standard tax deduction of 30% of net annual value (NAV) of the property is allowed to the taxpayer. Net annual value (NAV) is calculated as gross annual value (GAV) minus municipal taxes Paid. This deduction will be allowed irrespective of the amount spent on insurance, repairs, water and electricity supply, etc.
Interest paid on Home Loan:
- Deduction of interest paid on home loan for a self-occupied property is maximum Rs.2,00,000.
- In case where the property for which the home loan has been taken is not a self-occupied property i.e. if it is rented or deemed to be rented, no maximum limit for deduction has been prescribed and the taxpayer can take deduction of the whole interest amount u/s 24(b).
- Tax deduction of home loan interest u/s 24(b) is deductible on payable basis, i.e. on accrual basis. Therefore, deduction u/s 24(b) 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 80C deduction is allowed only on payment basis.
- The tax benefit u/s section 24 is reduced from Rs 2,00,000 to Rs 30,000, in case the property is not acquired or constructed within 3 years from the end of Financial Year(FY) in which the loan was taken. The Limit of 3 years is increased to 5 years from FY 2016-17 and onwards.
Pre-construction interest deduction is allowed under Section 24(b) when you have taken a loan for purchase or construction of a house property. However, in case loan is taken for repairs or reconstruction then deduction is not allowed. The deduction for this interest will amortize in 5 annual equal installments starting from the year in which the construction is completed. Home loan interest deduction cannot be claimed in case the house is under construction.
The amount that can be claimed in a financial year is subject to a threshold limit of Rs. 2,00,000 in case of house property is self occupied i.e. Pre-construction period and interest for current financial year, the aggregate amount is the actual amount of interest paid or payable which is allowed as deduction.
Income Tax Benefit on Home Loan Principal Repayment u/s 80C
Principal repayment amount on home loan taken for the construction or purchase of a new house property by an individual/HUF is allowed as deduction u/s 80C of the Income Tax Act.
Amount of Deduction Available
The maximum deduction allowed u/s 80C is Rs 1,50,000. This deduction is available on the payment basis & will not depend on the year in which the assessee has made the payment.
Stamp Duty & Registration Fee deduction u/s 80C
Stamp duty & registration fee amount paid is also allowed as a deduction u/s 80C. This can be claimed whether the assessee has taken a loan or not. You can claim the deduction in the year in which you have paid.
Some Conditions must be satisfied to claim deduction u/s 80C for principal repayment of home loan:
- You can claim deduction only if the construction of property is completed and you have received a completion certificate for the same.
- Deduction of interest on home loan cannot be claimed when the house is under construction.
- Deduction is also available whether the property is self-occupied or let out.
- The benefit of deduction u/s 80C can also be claimed for more than one house property.
4. Tax Benefits on Joint Home Loans
The joint owners, who are also co-borrowers of a self-occupied property, can claim a deduction on interest on the home loan under Section 24 upto Rs 2,00,000 each. and principal repayments deduction, including stamp duty and registration charges under Section 80C within the overall limit of Rs 1,50,000 for each of the joint owners. These deductions are allowed to be claimed in the same ratio as that of the ownership share in the property.
If you have taken the loan jointly, you are not entitled to the tax benefits unless you are the owner in the property. There will be situations where the property is owned by a parent and the parent and child together takes a loan which is paid off only by the child. In such a case the child, who is not a co-owner cannot take the tax benefits on the home loan.
Therefore, if you want to claim the tax benefits on the property:
1. You must be a co-owner in the house property
2. You must be a co-borrower for the home loan
Since, each co-owner can claim a deduction of maximum Rs 1,50,000 towards repayment of principal under section 80C. This is within the overall limit of Rs 1,50,000 of Section 80C. In case of families, you will be able to take a larger tax benefit against the interest payment on the home loan when the property is jointly owned and your interest paid is more than Rs 2,00,000 per year.
Note: The tax benefit of deduction on home loan interest and principal repayment under section 80C can be claimed only when the construction of the property is completed. These benefits will not be available for an under construction property.
5. HRA and Deduction on Home Loan
Yes, you can claim tax exemption on both house rent allowance (HRA) and repayment of housing loan. In case you are living in a rented house and paying home loan on another property , even if both the properties are located in the same city , you can claim tax benefit.
Salaried individuals who live in rented accommodation can claim HRA to reduce their tax liability. It is partially exempted. Hence, if the individual does not live in a rented accommodation, HRA is fully taxable.
The deduction on HRA is the lowest of the following under Section 10(13A) of the Income Tax Act:
a) Actual HRA Received
b) Actual Rent paid reduced by 10% of Salary
c) 50% of basic salary in case where taxpayer is residing in a metro city.
d) 40% of basic salary in case where taxpayer is residing in a non-metro city.
On the other hand, if you are paying a home loan you can also claim tax benefits on principal and interest payments. As per Section 80C of the Income Tax Act,1961 exemption up to Rs. 1,50,000 is allowed for Principal repayment and exemption up to Rs. 2,00,000 can be claimed for interest payment, under Section 24.
Mr. Aditya lives in New Delhi and earns a basic salary of Rs. 40,000 per month. The HRA received by him is Rs. 18,000 and actual rent paid by him is Rs 12,000. How much exemption will Mr. Aditya will get?
Solution: Let us look at the factors affecting HRA calculation:
a) Actual HRA received is (Rs 18,000 x 12) = Rs 2,16,000
b) Actual rent paid (Rs 12,000 x 12) – 10% of salary [(Rs 40,000 x 12) x 10%] = Rs 96,000
c) 50% of basic salary [(Rs 40,000 x 12) x 50%] = Rs 2,40,000
Therefore, Rs 96,000 is the least among the above obtained figures so Mr. Aditya can get Rs 96,000 exempt.
You are working in a city where you are living in a rented accommodation and you bought a house in your hometown.
Samarth works in Noida, but his wife and children live in Jaipur. He recently bought a house in Jaipur on a loan while he lives in a rented house.
Samarth can claim: HRA for rent he pays for the house in Noida, deduction of interest on home loan up to Rs.2,00,000 u/s 24b and principal repayment deduction under section 80C.
6. Loss from house property
- The two main reasons behind the loss from House Property are:
- Self-Occupied Property: In self-occupied property, Gross Value Added (GVA) will be ‘NIL’. But, from GAV municipal taxes and interest on loan can be subtracted. Ultimately, which would result in a Loss.
- Other type of property: Gross Value Added (GVA) is not ‘NIL’ as in case of Rented Property but if the deductions claimed is more than the GVA, this would again result in loss.
Let us understand with an Illustration
Illustration -1 Mr. Gupta is the owner of a flat, which is self-occupied. Municipal taxes paid for the flat is Rs.60,000. Interest paid on home loan is Rs.50,000. Calculate Income/Loss from House Property?
|Gross Annual Value (GAV)||NIL|
|Less: Municipal Tax/ Property Tax||(60,000)|
|Net Annual Value (NAV)||(60,000)|
|Less: Standard deduction u/s 24 (30% of NAV)|
|Less: Interest on Home Loan u/s 24(b)||(50,000)|
|Income Chargeable under “House Property”||(1,10,000)|
Illustration -2 Mr. Rajkumar is the owner of a flat which is let out at Rs.20,000 pm. Municipal taxes paid for the flat is Rs.20,000. Interest paid on home loan is Rs.1,80,000. Calculate Income/Loss from House Property?
|Gross Annual Value (GAV)||2,40,000|
|Less: Municipal Tax/ Property Tax||(20,000)|
|Net Annual Value (NAV)||2,20,000|
|Less: Standard deduction u/s 24 (30% of NAV)||(66,000)|
|Less: Interest on Home Loan u/s 24(b)||(1,80,000)|
|Income Chargeable under “House Property”||(26,000)|
Steps taken in case of House Property Loss
Setting off Loss under House Property: The loss from house property is allowed to be set off against any other income in same financial year. Other income includes salary, business or profession, capital gains and other sources.
Carry forward of loss: If the loss of house property is not adjusted in the same financial year, then such losses will be carried forward to next financial year’s and allows to set off only from the same head of income i.e., Income from House Property. Loss from House Property can be carried forward for maximum 8 years in Income Tax Return.
A new sub-section (3A) is inserted to section 71 in Budget 2017 which has now put a restriction, earlier it was not restricted. This restriction is of Rs. 2,00,000 i.e. loss from House Property of only Rs. 2,00,000 per annum is allowed to be set off with incomes under different heads.