All about House Property

What is house property?

House property as per the Income-tax Act, 1961 means any building (or land adjacent to such building) owned by the assessee himself. House property includes flats, shops, office space, factory sheds, commercial buildings, agricultural land and farmhouses 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 the 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-

1. Self-occupied house property;
2. Let out property;
3. Deemed to be let out property.

1. Self-occupied house property: This means property that is used by the assessee or his family for their own residence. As per the Income-tax Act, if the assessee owns more than one self-occupied property, only two 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, the question about rent receivable does not arise. Hence there is no income from self-occupied house property, however, interest paid on a housing loan can be claimed as a deduction.
2. 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.
3. 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 2 properties 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 the following steps:-

Points to remember-

1. Municipal taxes paid by tenants shall not be allowed.
2. If some municipal taxes remain unpaid during the year by the owner, no deduction is allowed.
3. No deduction for municipal taxes is allowed for self-occupied house property.
4. In the case of self-occupied property, the Gross Annual value is ZERO, and no deduction for municipal taxes is allowed hence Net Annual value is also ZERO).

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 the bank or any other lender. This EMI consists of 2 parts namely Interest & principal.

Deduction of interest part can be claimed from the income of house property whereas deduction of the principal amount in case of residential house property can be claimed U/s. 80C.

Deduction for housing loan interest depends upon the type of house property. The amount available for deduction in each type is as follows:

1. Self-occupied house property:

If the housing loan is taken to purchase or construct the property, then a maximum interest of Rs. 2,00,000/- can be claimed by taxpayers during a financial year.

Further, if the loan is taken to renovate or repair the property, then a maximum interest of Rs. 30,000/- can be claimed by taxpayers during a financial year.

2. 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?

The interest paid on housing loans 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 the following 2 cases-

1. 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.
2. Let out house property: If the taxpayer has borrowed a housing loan against let out property, then he shall pay interest on the 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?

The loss from house property can be set off only up to Rs. 2 Lakh in a year. The balance loss can be carried forward to the next 8 financial years for set off.

Set-off and carry forward of house property loss:

1. If the taxpayer is having more than one house property, then loss from one house property can be set off against the incomes of other house properties.
2. 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).
3. 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 income.
4. 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.