Income from House Property

Updated: 30-12-2022 11:21:03 AM

House property can mean flat, bungalow, land, shop, office space or any other type of real estate. The income (rent) from such property is taxable at your slab rate after taking into account certain deductions. If you own more than one property and keep such additional properties vacant, you will still have to pay tax on them. This would be termed ‘deemed rent’ and hence be taxable.

All About Income from House Property:

Income from house property is taxable in the hands of the legal owner of the property. Here, owner refers to the person who keeps all the rights such as maintaining or selling the property on his/her own behalf. However, there are a few conditions that must be met to tax the income from a property under the category of income from house property. These conditions are:

• The property must consist a piece of land or construction
• The assesses must be the owner of the property.
• The property must not be used for the owner’s own business or profit making activity. If the owner uses his/her property for his or her own business, then the property is not subject to taxes under the head of income from house property.

Calculation of Income from House Property:

Self-Occupied Property:

For the purpose of personal income taxation, the rental income on one self-occupied property is considered as zero. Individuals who own more than one property can show any of the properties as self-occupied and pay tax on income from the other house property. Here, tax liability can be calculated by choice. The owner can calculate the minimum tax liability on one property and choose to pay taxes on it. Owners can also switch the tax liability between the two properties year by year.

If an individual owns a house property and has to live someplace else due to his/her profession or work, they can claim the property as self-occupied unless it is not being rented and they do not receive any income from it. However this cannot be done if the individual concerned is claiming a deduction for HRA (House Rent Allowance) or for rent paid under Section 80GG

Property which is not self-occupied

The formula for tax calculation on income from a house property is as follows:

Gross Annual Value of the Property – Municipal Taxes – Interest on Home Loan = Net Annual Value

Taxable Income = Net Annual Value – Standard Deduction

Gross Annual Value is the maximum of actual rent received, fair market value, and municipal value.

• Municipal Value: The value of the property derived by the municipal authorities.
• Fair-Rental Value: This is an estimated rental value of the property assumed by comparing the property to another one with similar specifications and features.

Standard Deduction: A standard deduction is done on the 30% value of the net annual value of the property. It can be a deduction for repairs, society maintenance, home insurance, rent collection, etc. You do not need to show any expenditure receipts to claim standard deduction. However cannot go beyond the limit of 30% irrespective of the actual expenditure. In the case of a nil gross annual value, this deduction is not allowed.

Interest on Home Loan: Individuals can get a deduction on interest on home loan taken to purchase or renovate the property up to Rs. 2 lakh per annum under Section 24 of the Income Tax Act.

This taxable income is added to the owner’s total annual income in the financial year. Individuals can also balance their loss in case of a negative income from house property against other taxable income including their salary. However, as per budget 2017, the upper limit of loss from house property is now fixed at a maximum of Rs. 2 lakh. This can be adjusted in the same financial year against other income. Here it becomes important to understand the above terms to get clear idea of the variables and the way this tax is calculated.

Example:

Mr A owns a flat in Delhi which he rents out for Rs 30,000 per month. The municipal value and fair-rental value of the property stand at Rs 25,000 per month. Mr A pays property tax to the Municipal Corporate of Delhi of Rs 3,000 per month. He also took a loan to purchase the house on which he pays monthly interest of Rs 15,000. He will have to pay tax as follows:

Gross Annual Value: Maximum of actual rent/municipal value/fair rental value = Rs 30,000*12 = Rs 3,60,000.   

Municipal Taxes = Rs 3,000 * 12 = 36,000

Home Loan Interest = Rs 15,000 * 12 = 1,80,000

Net Annual Value:  GAV – Municipal Taxes – Home Loan Interest – Standard Deduction

= 3,60,000 – 36,000 – 1,80,000 = 1,44,000

Taxable Income = Net Annual Value – Standard Deduction = 1,44,000 – 30% * 1,44,000 = 100,800.

If the property is covered by a Rent Control Act

Several states have passed rent control laws. If a Rent Control Act applies to your property, the gross annual value is calculated differently. It is the higher of:

• Standard Rent: This is the fair amount of rent prescribed by the relevant Rent Control Act.
• Actual Rent Received: This is the actual amount of rent received by the owners excluding water bill, electricity bill, maintenance charges (if there are any).

Owner/Deemed Owner: A person entitled to receive the financial benefits from the property is considered as the owner. On the other hand, a person receiving the financial benefits from the property but not registered as the owner is called the deemed owner. The tax on income from house property has to be paid by the person receiving the monetary benefits from the property regardless of him being a registered owner or not.

Ways to Save Tax on Income from House Property:

Careful tax planning can save you a considerable amount of money from taxes on income from house property. Some smart and perfectly legal ways to save tax on such property are given here.

• Joint Home Loan: Individuals who own a house property jointly with their spouse or parent and apply for a joint home loan can claim the deductions under Section 24. As per the Section 24, the deduction on interest on home loan can be claimed up to Rs. 2 lakh for both owners.
• Joint Ownership: This is another good idea for reducing the tax burden. This approach comes in handy when both the registered owners of the house property are earning. Joint ownership divides the whole tax burden into two parts, hence reducing the tax load from one person.
• Owning More Than One Property: People who own more than one property can show either one of them as self-owned. They can calculate the taxes on both and choose the one as self-occupied having minimum tax liability. They can also switch the properties every year.
• Rent Your House Property: Owning a house property and not using it in any way is also a bad idea. Even if you have not rented your house property, it will attract tax through the provisions of deemed rent. In this case, it is better to rent it and avail benefits as per the Rent Control Act.