Tax on Income from House Property

Owning a house property is accompanied with plenty of responsibilities, one of them is paying house property income tax annually. Under the Income Tax Act, a house property includes both residential and commercial property such as your home, office, shop, building and a parking lot. All these types of properties are taxed under the category of “income from house property” in your tax return. 

This comprehensive blog will help you understand what is income from house property, how it is calculated, and how you can save tax on home loan interest and in turn earn from your house or rental property, with certain deductions allowed to reduce your tax burden.

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. 

There are broadly 4 types of properties mentioned under the Income Tax Act.

1. Self- occupied property

• It is the property in which you or your family (parents, spouse, or children) live. Even if the house is empty, it can still be considered self-occupied for tax purposes.
• From FY 2019-20 onwards, you can claim up to two houses as self-occupied. If you own more than two, the additional properties will be treated as rented out for tax purposes.

2. Let-out property

• Also known as inherited property, let-out property refers to house property that is rented for the whole or part of the year.
• It also refers to the house property in addition to 2 self-occupied properties, even if the property is vacant. 
• Inherited from parents, grandparents and can be self-occupied or let-out property.

3. Deemed to be Let-Out Property

• This refers to properties that are not physically rented out but are treated as such by tax authorities.
•  It generally applies to properties not occupied by the owner due to reasons like employment or business elsewhere. 
• In such cases, a hypothetical rental income is considered taxable, and the owner can claim deductions for municipal taxes and interest on home loans.

4. Under Construction Property

• Properties that are still being built or not yet ready for use are also considered for tax purposes. 
• During this phase, no rental income can be claimed since the property isn’t rented out. 
• However, once construction is finished, the tax treatment—whether as self-occupied or let-out—will be determined based on how the property is actually used or rented out.

Income from House Property is taxable, if

• The income is earned from any property such as land or building considering the annual value of that property stands more than zero.
• 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 Income From House Property Deductions?

As per Section 24 of the Income Tax Act, following are the income from house property deductions:

• 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.

• 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.

Tax Deduction on Home Loans

• Tax Deduction on Home Loan Interest: Section 24

Homeowners can claim a tax deduction of up to Rs 2 lakh on the interest paid on their home loan if they or their family live in the house. The same applies if the house is vacant. If the property is rented out, you can claim a deduction for the full interest amount on the loan.

However, the deduction is reduced to Rs 30,000 instead of Rs 2 lakh if any of the following apply:

1. Condition I:
   • The loan was taken on or after 1st April 1999.
   • The purchase or construction of the house was not completed within 5 years from the end of the financial year in which the loan was taken.
2. Condition II:
   • The loan was taken before 1st April 1999.
3. Condition III:
   • The loan was taken on or after 1st April 1999 for repairs or renovations.

• Tax Deduction on Principal Repayment: Section 80C

You can claim a deduction of up to Rs 1.5 lakh on the repayment of the principal amount of your home loan under Section 80C. To check how much you’ve repaid, you can ask your lender or check your loan statement.

Conditions for claiming this deduction:

1. The home loan must be for purchasing or constructing a new house.
2. The property must not be sold within five years of taking possession. If sold before five years, the deduction claimed will be added back to your income in the year of sale.

Stamp Duty and Registration Charges
You can also claim stamp duty, registration fees, and other related expenses as a deduction under Section 80C, up to a maximum of Rs 1.5 lakh. These expenses must be claimed in the same year you make the payment.

• Tax Deduction for First-Time Homeowners: Section 80EE

Section 80EE offers first-time homebuyers a tax benefit of up to Rs 50,000, provided they have only one house at the time of loan approval.

• Tax Deduction for Affordable Housing: Section 80EEA

Section 80EEA gives an additional tax benefit for interest on home loans for affordable housing, taken between 1st April 2019 and 31st March 2022. This is only available if you are not already claiming benefits under Section 80EE. These benefits don’t apply to properties under construction.

Claiming Deduction on Home Loan

• The deduction you can claim for a home loan depends on your share of ownership in the property. Both owners and co-borrowers can claim these deductions, but the loan must be in your name. You can only start claiming the home loan deduction in the financial year when the construction of the property is completed.
• To adjust tax deductions, submit your home loan interest certificate to your employer. This certificate shows your ownership share, borrower details, and the breakdown of EMI payments into interest and principal.
• If you don’t submit this certificate, you’ll need to calculate your taxes yourself and claim a refund when filing taxes, or pay any outstanding tax owed.
• For self-employed or freelance individuals, there’s no need to submit the documents anywhere, not even to the Income Tax Department. However, you’ll need them to calculate your quarterly advance tax payments and to answer any queries from the IT Department. Keep them safe for future reference.

Tax Benefits on Home Loans from Joint Owners 

If you and a co-borrower own a self-occupied house, both of you can claim tax deductions on the home loan. Each co-owner can:

• Claim a deduction of up to Rs 2 lakh for the interest paid on the home loan.
• Claim up to Rs 1.5 lakh for principal repayments, including stamp duty and registration charges, under Section 80C. This deduction is within the overall limit of Rs 1.5 lakh for each owner.

These deductions are based on your ownership share in the property.

However, simply being a co-borrower on the loan is not enough to claim these benefits. You must also be a co-owner of the property. For example, if a parent and child take a loan but the property is in the parent’s name, the child cannot claim any tax benefits, even if they are paying off the loan.

• To qualify for tax benefits on the home loan:

• You must be a co-owner of the property.
• You must be a co-borrower on the loan.

Each co-owner can claim up to Rs 1.5 lakh on the principal repayment under Section 80C, within the Rs 1.5 lakh overall limit. Owning the property jointly increases the potential tax benefits, especially if the interest payments exceed Rs 2 lakh per year.

Exclusions to Income from 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 section 23(3).
• Business or professional 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 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 Authorities, Scientific Research Institute, Political Parties, Educational Institute, or Medical Institute is free from tax under Section 10(20) of the Income Tax Act.  
• Palaces occupied by former rulers.
• Properties owned by local authorities.
• Properties owned by members of Scheduled Tribes.
• Properties of statutory corporations or institutions funded by the government to support Scheduled Castes or Tribes.
• Corporations established by the government to promote minority interests.
• Cooperative societies were created to benefit Scheduled Castes or Tribes.
• Institutions that promote Khadi and Village Industries.
• Self-occupied houses that were not rented during the previous year.