What is house property?
House property as per the Income-tax Act, 1961 means any building (or land adjacent to such building) owned by assessee himself. House property includes flats, shops, office space, factory sheds, commercial building, agricultural land and farm houses etc.
When is house property income taxable?
House property income (rental income) is taxable. Even if house property is not registered in the name of taxpayer, rental income shall be treated as his income because he is enjoying the ownership right viz. possession of such house property.
What are the categories of house properties ?
There are 3 categories of the house property as under-
- Self occupied house property;
- Let out property;
- Deemed to be let out property.
- Self occupied house property- This means property which is used by assessee or his family for their own residence. As per the Income-tax Act, if assessee owns more than 1 self occupied properties, only one of them can be claimed as Self occupied property. The taxpayer can choose any beneficial property as his self occupied property. As the owner himself is residing in it, question about rent receivable does not arise. Hence there is no income from self occupied house property, however interest paid on housing loan can be claimed as deduction.
- Let out property- This means the property which has been let out by an assessee for monetary consideration i.e. rent. The rent received shall be treated as ‘Income from house property’.
- Deemed to be let out- All vacant properties are treated as ‘Deemed to be let out’. Also if the taxpayer is having more than one self occupied house property then any 1 property can be claimed as self occupied house property and all other self occupied house properties will be treated as “Deemed to be let out”. The fair rent receivable from such property shall be treated as ‘Income from house property’. Fair rent can be computed on the basis of rental income for similar house property located in the same area.
How the house property is computed?
Income from house property can be computed with following steps:-
Step I- Fair market value or municipal value (Government valuation) of the property, whichever is higher.
Step II- Amount calculated in Step I above or Actual rent receivable from house property, whichever is higher.
Step III- Gross Annual Value (GAV) -
If the house property has remained vacant during any part of the year, the rental income not received by taxpayer due to such vacancy shall be deducted from amount calculated in Step II. So taxpayer will get Gross Annual Value of the property.
GAV= Amount computed in Step II minus Vacancy Loss.
(Note- In case of self-occupied house property, as there is no rental income received by taxpayer, Gross annual value of a self occupied property is always ZERO).
Step IV- Net Annual Value (NAV) -
Net Annual Value shall be computed as follows-
Gross Annual Value of the property minus municipal taxes paid during the year by the owner.
Points to remember-
- Municipal taxes paid by tenant shall not be allowed.
- If some municipal taxes remain unpaid during the year by owner, no deduction is allowed.
- No deduction for municipal taxes is allowed for self occupied house property.
- In case of self occupied property, Gross Annual value is ZERO, and no deduction for municipal taxes is allowed and hence Net Annual value is also ZERO).
Step V- Eligible Deductions
There are 2 deductions which are eligible to be deducted from NAV namely:
- Standard Deduction of 30% of NAV.
- Interest on housing loan.
Step VI- Income from house property
Net Annual Value minus eligible deduction.
What are the eligible deductions allowed to be deducted from house property income?
Rental income received by taxpayer is taxable under ” Income from House Property”. However Income Tax Act, 1961 has provided some expenditures under Section 24 which can be claimed as deduction.
There are 2 deductions eligible to be deducted from Net Annual Value of house property namely:
- Standard Deduction of 30% of NAV.
- Interest on housing loan.
What is Standard Deduction?
There might be various expenses that are spent to maintain the house property such as repairs, maintenance, depreciation, etc. To cover all these expenses, the Income-tax Act provides a standard deduction of 30% from Net Annual Value of house property. It is presumed that all the expenses (excluding Interest on housing loan) are covered in this 30% limit and no deduction or expenses in addition to this limit is available to taxpayer even if actual expenses are higher than standard deduction.
(Note- This standard deduction is available to the owner taxpayer even if no expenses are incurred by him or all the expenses are incurred by the tenant).
- Interest on housing loan-
If the taxpayer has borrowed a housing loan to purchase or to construct a house property, then he is required to pay EMI to bank or any other lender. This EMI consists of 2 parts namely Interest & principal.
Deduction of interest part can be claimed from income of house property whereas deduction of principal amount in case of residential house property can be claimed U/s. 80C.
* Deduction for housing loan interest depends upon type of house property. Amount available for deduction in each type as follows-
- Self occupied house property:
If the housing loan is taken to purchase or construct the property, then maximum interest of Rs. 2,00,000/- can be claimed by taxpayer during a financial year.
Further if the loan is taken to renovate or repair the property, then maximum interest of Rs. 30,000/- can be claimed by taxpayer during a financial year.
- Let out or deemed to be let out property:
There is no ceiling limit for claiming deduction of interest on housing loan on let out property.
What is the tax treatment of pre-construction interest?
Pre-construction interest:- The interest paid on housing loan when the house property is under construction is known as “Pre-construction Interest”. The deduction of such pre-construction interest is allowed in 5 equal instalments starting from the year when construction completes.
How the loss from House Property is considered for taxation?
House property loss can be possible in following 2 cases-
- Self occupied property:- Gross Annual Value of self occupied property is always NIL. If the taxpayer has borrowed a housing loan against his self occupied property, then the interest paid on such loan is deducted from his Net Annual Value which results in loss from house property.
- Let out house property:- If the taxpayer has borrowed a housing loan against let out property, then he shall pay interest on housing loan. If the aggregate of standard deduction and interest paid on loan exceeds the Net Annual Value of the house property, then there shall be a loss from let out house property.
How the house property loss is set-off & carried forward?
Set-off and carry forward of house property loss:
- If taxpayer is having more than one house properties, then loss from one house property can be set off against incomes of other house properties.
- If there is no other house property income available to set off, then loss from house property can be set off against any other income (i.e. salary, business income, capital gains, other sources).
- If the loss still exists, then such loss can be carried forward to the next year. However, if a loss is carried forward to next year then it can be set off against house property income only. Hence, last year’s house property loss cannot be set off against any other incomes.
- A house property loss can be carried forward to the next 8 financial years only. If loss still persists after the end of 8 financial years, then such loss shall be forgone.