Income from House Property and Taxes

In our previous newsletter, we delved into the intricacies of income tax. Now, let’s explore a specific aspect – income from house property.

Budget 2023 proposes a change in the calculation of the cost of acquisition for residential properties. It suggests excluding home loan interest claimed as an income-tax deduction by the seller when computing capital gains from the sale of such properties. Understanding income tax on house property is crucial for homeowners, and this guide provides insights on saving tax on home loan interest and reporting home ownership in income tax returns.

Basics of House Property Tax:

A house property, whether residential or commercial, is taxed under the head ‘income from house property.’ This includes homes, offices, shops, buildings, or land attached to buildings. The owner, for income tax purposes, is the legal owner with the right to exercise ownership rights.

Types of House Property:

1. Self-Occupied House Property:
   • Used for one’s residential purposes.
   • A vacant house property is considered as self-occupied for the purpose of Income Tax.
   • Benefit extended to 2 houses from FY 2019-20 onwards.
2. Let Out House Property:
   • Rented for the whole or part of the year.
3. Inherited Property:
   • An inherited property i.e. one bequeathed from parents, grandparents, etc.
   • Can be self-occupied or let out based on its usage.

How to Calculate Income From House Property:

1. Determine Gross Annual Value (GAV):
   • GAV is zero for a self-occupied house.
   • For a let-out property, it’s the rent collected.
2. Reduce Property Tax:
   • Allowed as a deduction from GAV.
3. Determine Net Annual Value (NAV):
   • NAV = GAV – Property Tax.
4. Reduce 30% of NAV (Standard Deduction):
   • Allowed as a deduction under Section 24.
5. Reduce Home Loan Interest (Section 24):
   • Deduction available for interest paid during the year on a housing loan.
6. Determine Income From House Property:
   • The resulting value is your income from house property.
   • Taxed at the applicable slab rate.
7. Loss From House Property:
   • Self-occupied property: When you own a house you live in, it generates no income, so the gross annual value (GAV) is zero. However, you can still deduct home loan interest payments. This deduction creates a “loss from house property.”
   • Let-out property: When you rent out a property, the GAV is based on the rental value, which must be at least as high as the municipality’s reasonable rent for similar properties.

Tax Deduction on Home Loan Interest: Section 24

1. General Deduction: Homeowners can claim up to Rs 2 lakh on home loan interest if the property is self-occupied or vacant. For rented properties, the entire interest is deductible.
2. Limitation to Rs 30,000: Limited to Rs 30,000 if:
   • Condition I: Loan taken after April 1, 1999, and construction not completed within 5 years.
   • Condition II: Loan taken before April 1, 1999.
   • Condition III: Loan after April 1, 1999, for repairs or renewal.
3. Pre-construction Period: Interest during the construction phase is not deductible. It’s claimable in five equal installments after construction completion.

Tax Deduction on Principal Repayment

1. Amount: Up to Rs 1,50,000 within Section 80C.
2. Conditions: Loan for purchase or construction, and property must not be sold within five years.
3. Stamp Duty and Registration Charges: Deductible under Section 80C, capped at Rs 1.5 lakh. Claim these expenses in the same year you make the payment on them.

Claiming Deduction on Home Loan

1. Deduction depends on ownership share, applicable to co-borrowers.
2. Deduction begins when construction is completed.
3. Submit interest certificate to the employer for TDS adjustments or calculate and claim during tax filing.
4. Self-employed or freelancers need documents for quarterly advance tax calculations.

Tax Benefits on Home Loans for Joint Owners

1. Joint owners and co-borrowers can claim:
   • Interest deduction up to Rs 2 lakh each.
   • Principal repayment, stamp duty, and registration charges under Section 80C within Rs 1.5 lakh limit for each joint owner.
   • These deductions are allowed to be claimed in the same ratio as that of the ownership share in the property.
2. To claim benefits, one must be:
   • Co-owner in the property.
   • Co-borrower for the loan.
3. Deductions are based on ownership share, providing an enhanced benefit if the joint owners’ interest outgo exceeds Rs 2 lakh annually.

Note: Both interest and principal repayment deductions are applicable only after the construction of the property is complete.

HRA and Deduction on Home Loan:

Scenario 1:

Balbir owns a small house in the suburbs of Delhi, which is currently unoccupied. Due to its small size and inconvenient location (far from his office, son’s school, and wife’s workplace), Balbir and his family rent an apartment in Noida. Balbir is paying interest on the loan for his own house.

Balbir can claim:

• HRA for the rent he pays for the apartment in Noida.
• Deduction on interest up to Rs 2,00,000 on the home loan.

Scenario 2:

Abrar recently purchased a flat in Indore but currently lives and works in Bangalore. With no plans to return to Indore in the next five years, Abrar has decided to rent out her flat. Abrar lives in a rented apartment in Bangalore.

Abrar can claim:

• HRA for the rent he pays for the apartment in Bangalore.
• The entire interest he pays during the year on the home loan for her flat in Indore.

Frequently Asked Questions about Income from House Property

1. What happens if I live in my own house? If you live in your property throughout the year and don’t rent it out or use it for other purposes, it’s called a self-occupied house. In this case, the gross annual value is considered zero, and there is no income from your house property.
2. I use the ground floor for my business and live on the first floor. How is it taxed? The ground floor used for business is taxed under the business profession head. The first floor, where you live, is treated as a self-occupied house, resulting in zero income from house property.
3. If a house is self-occupied for six months and rented for six months, how is the income calculated? Calculate the gross annual value based on reasonable and actual rent. If actual rent is lower due to vacancy, use it as gross annual value. If it’s lower for other reasons, use reasonable rent. Income from subletting is not taxed under “Income from House Property”. It will be chargeable under “Other Sources”.
4. Can I claim a deduction for interest on a loan from friends or relatives? Yes, you can claim a deduction under Section 24 for interest paid on a loan from friends or relatives. The law doesn’t specify that the loan must be from a bank to claim this deduction. But here, one must note that the principal repayment in respect of such a loan will not qualify for a deduction under Section 80C.
5. I took a home loan for construction. Can I claim benefits before the construction is complete? Yes, you can claim pre-construction interest as a deduction from the Net Annual Value, spread over five years starting from the year of construction completion.
6. How do deductions work for a home loan on two houses? Deductions under Section 24 for interest on home loan can be claimed for each house separately, but the overall loss is limited to Rs 2 lakhs. Section 80C deductions for the principal portion are capped at Rs 1.5 lakhs per financial year.
7. What are self-occupied, let-out, and deemed let-out properties? Self-occupied: You or your family live there, and there’s no rental income. Let Out: Rented to others, generating rental income. Deemed Let Out: If you own more than two properties, the third is deemed to be let out.
8. I’ve incurred a loss from house property. Will missing the filing deadline affect loss carry-forward? Losses from house property can be carried forward even if the return is not filed on time, unlike other losses.
9. Can I claim a deduction for municipal taxes paid in the next financial year? No, municipal taxes are deductible only when paid. So, if you paid them in the next financial year, the deduction applies to that year.
10. I own a rented shop space. How is the rental income taxed? Rental income from a rented shop, being a building, should be taxed under “Income from House Property.”
11. I gifted my flat to my wife, and she earns rent from it. Is it her income? Since it’s a gift, you’re the deemed owner, and the rental income will be added to your income.
12. I received unrealized rent arrears. How is it taxed? Include unrealized rent received in the year of receipt, and you can deduct 30% of it while calculating income tax.
13. I have 5 let-out properties. Do I calculate income for each property separately? Yes, calculate income separately for each property.
14. My property was self-occupied for part of the year and let out for the rest. How is the income computed? For tax purposes, consider the property as let-out for the entire year, but only actual rent during the let-out period is considered.
15. If part of my property is self-occupied and part is let out, how is income calculated? Treat each unit as independent. Income from the owner-occupied unit is calculated as self-occupied property income, and income from the let-out unit is treated as let-out property income.
16. Can I claim both HRA and home loan benefits? Yes, you can claim House Rent Allowance (HRA) and deductions for home loan separately. Ensure proper documentation to avoid issues with the tax department.

Author

CA MOHIT LOONKAR