Owning a house property is entitled with plenty of responsibilities, one of them is paying house property tax annually. The house property tax includes both residential and commercial property such as your home, office, shop, building and a parking lot as well. This blog will help you understand how you can save tax on home loan interest.
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What is Income from House Property
In simple terms, Income from house property is the revenue generated by owing as well as renting out any property. This revenue includes the rent received on your property minus some deductions and expenses. This act is governed by section 22-27 of the Income Tax Act, 1961.
Income from House Property is taxable, if
- If the income is earned from any property such as land or building considering the annual value of that property stands more than zero.
- If the lease amount is received from the leasing property.
- The income that is received for the leased property is at least 12 years or more than that.
- As per section 27, the property of any deemed owner is also subject to tax payment. The Deemed owner is the one who has transferred their rights on the property but still holds a control over the property.
What are the key deductions under the House Property Act?
As per section 24 of the Income Tax Act, following are the key deductions under the House Property Act:
- Standard deduction: The act states that for all the rental properties, 30% of the net annual value shall be deducted.
- Interest: Up to Rs. 2,00,000 is applicable on all the self-owned properties and no specific limit for the let-out properties. It is applicable only if the construction or acquisition of the property is completed within 5 years from the date.
- Municipal tax deduction: To attain the net annual value, the annual amount paid to the municipal corporation shall be deducted from the gross annual value.
- Pre- construction Interest: Deduction can be levied on pre-construction interest on home loans of up to Rs. 2,00,000.
- First time buyer deduction: Under the section 80EE, anyone buying a home for the first time can claim an additional deduction of Rs. 50,000 on the interest paid considering the property and loan amount is less than ₹45 lakhs and ₹35 lakhs respectively.
How to calculate Income from House Property
Following are the steps you need to follow to understand how to calculate the income from house property.
- Find out your property type: There are broadly 3 types of properties mentioned under the Income Tax Act.
- Self- occupied property: Annual value of this property is considered nil. However, you can avail interest on a home loan for up to Rs. 2,00,000.
- Let-out property: Here the annual value refers to the rent received. Standard deduction of 30% on the interest of home loan can be availed.
- Deemed Let-out property: Notional rent stands as the annual value here.
- Calculation of Gross Annual Value: In case of any let-out property, the GAV is the rent received. For any self- occupied property, GAV is nil.
- Municipal tax deduction: Taxes paid to municipal corporations throughout the year shall be deducted here to achieve the NAV (Net Annual Value).
- Standard deduction: 30% of the NAV is subject to standard deduction.
- Deduct Interest on Home Loan: While acquiring, constructing or renovating any property, if interest is paid on home loan, it shall be deducted here.
- Calculate income from house property: The final income here is the NAV minus standard deduction and interest on home loan.
Let’s understand the process with an example: Suppose you own a let-out property and rent for the same is Rs. 2,00,000. Municipal taxes are Rs. 10,000.
| Gross Annual Value | ₹2,00,000 |
| Minus Municipal Taxes | (₹10,000) |
| Net Annual Value | ₹1,90,000 |
| Minus 30% Standard Deduction (Under section 24A) | (₹57,000) |
| Minus Interest on Home Loan (under section 24B) | (₹1,00,000) |
| Income from House Property | ₹32,000 |
What is the income free from tax on house property?
Following are the cases under which your income from house property is free from tax.
- Agricultural house income: Under section 10(1) of the Income Tax Act, any house property or land situated on or in proximity with the agricultural land and is used for agricultural purposes shall be exempted from income tax.
- Property for charitable purposes: Section 11 of the Income Tax Act states that any property owned for the purpose of charity or any religious purpose is not subject to income tax.
- Vacant house: Any self-owned property that is vacant, the annual value of the property is nil hence is not applicable for any tax payment under the section 23(3).
- Business or profession property: If the owner’s business is being carried forward from any owned property, it is not subject to income tax payment.
- Property of registered Trade Union: Under the section 10(24), while calculating the gross total income, no tax shall be charged on any house property owned by Trade Union.
- Income from House Property Held by Local Authority, Scientific Research Institute, Political Party, Educational Institute, or Medical Institute is free from tax under Section 10(20) of the Income Tax Act.
FAQs
What are the tax benefits of a home loan?
Home loan in India is subject to various deductions such as 30% Standard deduction, deduction on interest paid, deduction for first time buyers and many more which reduces the ultimate tax payment.
Which income from property is non taxable?
Income from property is non taxable if the property owned is for agricultural purpose, charity purpose, personal business purpose, owned by any Trade union or is self occupied but vacant.
How can you save tax on income from house property?
Under various sections of the Income Tax Act, any payer can avail deductions in the tax payment depending on the claws that match your property. A standard deduction of 30% and municipal deduction can be availed by every property owner.
