House Property Income and Taxation

One of the most prized possessions of an individual is a house and so every individual dream of owning a house to his/her name. When you have a house property to your name, there would be tax implications if you earn any income from the property. According to the Income Tax Act income generated from all types of properties, commercial or residential, is considered under the head ‘Income from House Properties’. The income is calculated and then taxed as per the prevailing tax laws. 

Let’s understand how: - 

Types of House Properties 

 Self-occupied Houses

• Property used by an individual for residential purposes is termed as a self-occupied residential property for all taxation purposes. Even under circumstances where the house is being used by the parents, children or spouse or even if vacant, it is considered to be self-occupied. Starting from the Financial Year 2019-20, a taxpayer is allowed to claim two houses as self-occupied property which was earlier restricted to one. 

• Let-out Houses
  A house property owned by the taxpayer which has been let out to others for rent comes under the category of Let-out House Property for taxation purposes. This applies irrespective of the fact that the property is let out for a whole or part of the year. 

• Inherited Property
  Any property inherited by the taxpayer as ancestral assets from parents or grandparents is deemed to be Self-occupied or Let-out property depending upon the usage of the same for taxation purposes.

How to Calculate Income from House Property?

Mentioned below are all the calculations needed to ascertain the income from house property.

• Calculate the Gross Annual Value or GAV: A self-occupied House Property has a Gross Annual Value of zero whereas the rent received for the Let-out House Property denotes its Gross Annual Value.
  
  
• Calculate the Net Annual Value or NAV: Once the Property Tax is paid, it is deducted from the GAV of the respective property. This gives the Net Annual Value of the Property.
  
  
• Reduction from NAV: Section 24 of the Income Tax allows a deduction of 30% on the NAV excluding of any kind of painting, repair or other expenses which are non-permissible beyond the 30% deduction.
  
  
• Deduction of Home Loan Interest: If the taxpayer has paid any interest on home loans during the year, it is liable for deduction under Section 24.

This calculation determines your Income from House Property. In the case of a Self-occupied House where the GAV is zero, home loan interest deduction results in a loss which can be adjusted against income from other sources.

Tax Deductions Applicable on Home Loans

A Tax deduction of Rs.2 lakhs is applicable on all home loan interest for self-occupied house properties. For a rented property deduction is applicable to the complete interest amount. This deduction is subject to the following two conditions fulfillment of which limits the deduction to Rs.30, 000 instead of Rs.2 lakhs.

• If the date of availing the loan is on or after the 1st of April 1999.
• If the construction or purchase of the concerned property is not completed within the time span of 5 years from the year in which the loan was taken.

Tax Deduction on Repayment of Principal Amount

Section 80C of the Income Tax Act provides a deduction of up to Rs.1,50,000 for repayment of the principal amount inclusive of the stamp duty and registration charges, subject to the following conditions:

• The loan must be availed for the purpose of purchase or construction of a new property and not of any existing property of the taxpayer.
• The property has to be retained by the taxpayer for a minimum period of 5 years from the time of possession.

Tax Deductions for First-time House Property Owners

A recent addition to the Income Tax Act under Section 80EE provides a tax benefit of Rs.50,000 to owners of only one property at the time of sanction of the home loan. Properties under construction are not eligible for this deduction. 

Tax Deduction for Home Loans for Joint Ownership Property

A tax rebate of Rs.2 Lakh each is available to the joint owners of a property on the loan interest paid by them. They also enjoy tax deduction in principal repayment inclusive of stamp duty and registration charges with a maximum limit of Rs.1.5 lakhs. The claim for tax reduction is based on the same ratio as the ownership ratio of the property. It is mandatory for the claimants to be co-owners of the property and co-borrowers of the loan to avail this particular tax concession.

FAQs (Frequently Asked Questions on House Property and Taxation)

• If a property is not used by the owner for residential purposes, is it still considered self-occupied house property?

Answer: A self-occupied house property is defined as one which is under the ownership of the taxpayer or parents, spouse or children. If it is not occupied by either the entities mentioned and the property is also not let out to anyone for any period of time during the year, it is treated as a self-occupied house property.

• When a home loan is availed from friends, relatives, and other acquaintances, then is the taxpayer liable to the deduction on the interest paid for such loans?

Answer:  Section 24(B) of the Income Tax Act allows a deduction for interest on such loans only if the loan is specifically taken for the purchase, construction, repair or renewal of the house. Also important is that the friend or relative to whom the interest is being paid becomes liable to pay relevant taxes on interest earned from the loan.

• If a property is partially used for self-occupancy and partially rented, what is the taxation process for the same?

Answer:  In the case of a property being used for both self-occupancy and rental purposes, the property is counted as independent units used for different purposes. The units used by the owner will then be treated as self-occupied house property and the units lent out by the owner will come under Let-out house property.

• If a taxpayer lives in another property on rent despite having his own house which is lying vacant and for which he is also paying interest on the home loan, what can he claim as a tax deduction?

Answer: In the case of a vacant property for which interest on a home loan is being paid, the taxpayer can claim a deduction on the interest paid on the loan to a maximum of Rs.2 lakhs. Also as he is residing at a rented property, he can claim House Rent Allowance for the rent being paid by him.

• When is the Home loan interest deduction limit set at Rs.30,000?

Answer: The deduction for interest on a home loan is capped at Rs.2,00,000 for all taxation purposes. But if the taxpayer fails to complete construction of the property within 5 years of the date of availing the loan, the deduction value is brought down to Rs.30,000. The period of 5 years is calculated from the end of the financial year in which the loan has been taken. This time period was earlier set at 3 years which has been increased to 5 years in the year 2016.