Income from House Property under Income Tax: How to compute tax on House Property

The Income Tax Act classifies income earned by an individual in five distinct categories namely:

Salaries
Income from House Property
Profit and Gains of Business or Profession
Capital Gains
Income from Other sources

An individual derives income from a house property in various manner namely rental income, gains on sale of house property. Gains on sale of house property are taxed under “Capital Gains” whereas income derived from renting of any property is taxable under the category “Income from House Property”. It is important to note that rental income from any constructed property whether it is a residential or commercial property is covered under this head. If you are the one who is earning income from house property, this article is meant for you. If you want to save taxes on house property, read this guide carefully.

Types of House Property for Income Tax

A house property could be a residential house, shop, office or a commercial building or any land attached to such building like a parking lot. For the head “Income from House Property”, no differentiation is made between commercial or residential property. All kind of properties could be taxed under the head “Income from House Property” while filing ITR.

However, if any such property is used by any person for his own business or profession, it is covered under the head “Profit and Gains of Business or Profession”. In such case, you can claim expenses incurred on repairs or maintenance of building as a legitimate business expenditure.

Categories of House Properties for Income Tax

The income Tax Act broadly classifies the house properties into the following categories:

Self-Occupied House Property

A Self-Occupied House Property is the one which is used by a person for his/her own residential purposes. Such house property could be occupied by the person himself or by his family like parents, spouse and/or children. If a person owns only one house property and it remains vacant, still it will be considered as a “Self-Occupied House Property”.

Earlier, the Income Tax Law provided that if a person owns more than one house property, any one house property of his choice could be considered as a self-occupied property and the other remaining properties were to be considered as let out properties. This meant that he will have to pay income tax on notional rent of remaining properties.

However, the law was amended and from FY 2019-20 (Assessment Year 2020-21), a person can own two house properties as self-occupied property without paying any income tax on notional rent. This simply means that now a house owner can claim 2 properties as self-occupied and notional rent of remaining properties will be taxed while filing income tax return.

Let-Out Property

A Let-out property is one which has been rented by the owner to another person. According to the Income Tax law, the rental income earned from such a property is taxable under the head “Income from House Property”. However, it is not the case that the entire rental income is taxable. The Income Tax Department allows a deduction @ 30% from the net rental income towards repairs & maintenance of the property. Besides this, municipal taxes and interest on home loan are also allowable deductions.

Deemed Let-out Property

As already discussed above, when a person owns more than two house properties, he can claim maximum two properties as self-occupied. Thus, the remaining other house properties of that person shall be deemed to be let-out and he shall be liable to pay income tax on the notional rent of such other properties.

Basic conditions for taxability under head Income from House Property

The following three conditions must be fulfilled for taxability of income under the head “Income from House Property”:

The property must consist of buildings and lands appurtenant (attached) thereto
You must be the owner of the property
The property is used for any purpose except by owner for running his business or profession

Note:

Rental income from vacant land is taxed under the head “Income from Other Sources”.
If you are earning income from sub-letting of any property, such rental income from sub-letting will be taxable under the head “Income from Other Sources”.

How to calculate Income from House Property

Here are the steps for computing the income from House Property:

Determine Gross Annual Value (GAV) of the property: Gross Annual value is the annual value of any property which the property might reasonably be expected to generate if let out for year to year. It is something like notional rent which could have been derived, had the property been let. Following four factors are important for determining the gross annual value:

Annual Rent Received or Receivable

Municipal Value: This is the value of house property which is determined by the municipal authorities for levying municipal taxes

Fair Rent of Property: Fair Rent is the rent which a similar property can fetch in the same or similar locality, if it is let for a year

Standard Rent: Standard Rent is the rent fixed under the Rent Control Act. If the standard rent has been fixed for any property under this Act, the owner cannot charge a higher rent.

The Gross Annual Value of self-occupied house property is taken as ‘Nil’. In the case of let out property or deemed let out property, the rent received or receivable is generally taken as Gross Annual Value but if the realizable (expected) rent is higher from actual rent, then, such realizable (expected) rent is considered based on the three factors as discussed above.

Determine Net Annual Value (NAV): Calculate Net Annual Value by deducting municipal taxes paid during the year from the Gross Annual Value.

Net Annual Value = Gross Annual Value- Municipal Taxes Paid

Note: Municipal Taxes paid during the year (irrespective of the year to which it belongs) shall be deducted from GAV.

Deduct Standard Deduction @ 30%: According to section 24 of the Income Tax Act, a deduction equal to 30% of Net Asset Value is allowed as standard deduction from Net Asset Value (NAV). This is an adhoc deduction towards repairs & maintenance of the house property irrespective of the actual expenditure incurred.

Deduct Home Loan Interest: Section 24 of the Income Tax Act allows a deduction of interest paid during the year on housing loan availed against the property.

Determine Income from House Property: The resultant value derived after following the above steps is “Income from House Property”. Income from House Property shall be taxable as per the applicable slab rates.

Set off Loss from House Property

In case of a house property claimed as self-occupied, Gross Annual Value is considered as ‘Nil’. Thus, if you have taken a housing loan, claiming interest on housing loan will result in a ‘Loss under House Property”. This loss can be adjusted against income from other heads thus saving income tax for you. Therefore, for legitimate tax planning, you can take a home loan and claim deduction for interest on housing loan.

Note: It is important to note that where the taxpayer has a loss under house property, he shall be entitled for set off such losses to maximum extent of Rs. 2 Lakhs against income under the other head. The remaining losses after set off will be allowed to be carried forward for 8 subsequent years. However, in such subsequent years, carried forward losses will be allowed to be adjusted against “Income from House Property” only.

How to Calculate the Gross Annual value of the Let-Out Property-Example

Gross Annual Value (GAV) of a self-occupied house property is taken as ‘Nil’. In case of let-out property and deemed let-out property, GAV needs to be calculated. GAV will be higher of “Expected Rent” and “Actual Rent Received or Receivable”.

What is Expected Rent for GAV?

Expected Rent is the higher of the fair rent and municipal value but it cannot exceed standard rent.

For Example: Ram lets out a house property for which Municipal Value is Rs. 90,000, Fair Rent Rs. 84,000, Standard Rent Rs. 72000. Actual Rent Received Rs. 70,000.

Solution:

Particulars	Amount in Rs.
(1) Municipal value	90,000
(2) Fair Rent	84,000
(3) Higher of (1) and (2)	90,000
(4) Standard Rent	72,000
(5) Expected Rent: Lower of (3) and (4)	72,000
(6) Actual Rent Received or Receivable	70,000
Gross Annual Value (GAV)- Higher of (5) and (6)	72,000

What is Actual Rent Received or Receivable?

Actual Rent means the rent receivable for the property during the year. Unpaid rent or unrealized rent is allowed to be subtracted from the actual rent receivable if certain conditions are fulfilled:

The defaulting tenant has vacated the house or efforts have been made to get house vacated
The tenant is not in occupation of any other property belonging to the owner.
The owner has made legal resorts for recovery of rent or prove that legal actions will not be of use.

How to Calculate Income from House Property for ITR Filing- With Illustrative Example

House Property Income Calculation

Particulars	Amount in Rs.
Gross Annual Value	XXX
Less: Municipal Taxes Paid during the year	XXX
Net Annual Value	XXX
Less: Deductions Under section 24(a)- 30% of NAV Under section 24(b)- Interest on Housing Loan	XXX XXX
Income from House Property	XXX

Take an example:

Suppose Fair Rent is Rs. 2,50,000 and Actual Rent for F.Y. 2023-24 is Rs. 2,80,000. Municipal taxes paid in FY 2023-24 Rs. 10,000 for FY 23-24 & Rs. 10,000 for FY 22-23. Interest on housing loan Rs. 70,000.

Particulars	Amount in Rs.
Gross Annual Value: Fair Rent or Actual Rent (Higher of)	2,80,000
Less: Municipal Taxes Paid during the year (10,000 + 10,000)	20,000
Net Annual Value	2,60,000
Less: Deductions Under section 24(a)- 30% of NAV Under section 24(b)- Interest on Housing Loan	78,000 70,000
Income from House Property	1,42,000

How to Calculate Income from Self-Occupied House Property?

We have already discussed above that earlier in case of an assessee owning more than one residential house, only one house property was treated as self-occupied and he was required to pay tax on notional rental value of other properties. Later, the law has been amended and an assessee can claim two house properties as self-occupied. This amendment has undoubtedly relaxed tax burden of the taxpayers.

Where property has been occupied by any person for the purposes of business or profession, it will be treated as below:

If Property used for business or profession

If any person uses property for his business or profession, such property shall not be dealt under “Income from House Property”. In such case, you are eligible to claim expenses relating to repairs and maintenance of the property from “Profits and Gains of Business or Profession”.

If Property provided to employees as residential quarters

This is also treated as use of house property for the purpose of own business or profession and therefore not considered under the head “Income from House Property”. Sometimes, rent is recovered from the employees for the same, in that case, such rental income will be taxable under the head “Profits and Gains of Business or Profession”.

Calculation of Income from Self-Occupied House Property- Example

Ramesh owns a house property which has been used by him for his own residence. Municipal value of the house is Rs. 3 Lakhs and Fair Rent Rs. 4 Lakhs. Municipal taxes paid by him Rs. 30,000. Interest on housing loan paid by Ramesh is Rs. 2,30,000. Calculate Income under House Property.

Solution:

Particulars	Amount in Rs.
Gross Annual Value (Since self-occupied)	Nil
Less: Municipal taxes (Since self-occupied)	Nil
Net Annual Value	Nil
Less: Standard Deduction Less: Interest on Housing Loan (restricted to Rs. 2 Lakhs in case of self-occupied property)	Nil 2,00,000
Income from House Property	(2,00,000)

Note: In case of self-occupied house property, deduction for interest on housing loan as per section 24 is allowed only to the maximum extent of Rs. 2 Lakhs. Therefore, even if actual interest amount is higher, deduction for interest shall be restricted to Rs. 2 Lakhs.

How to calculate Income from Let Out House Property- Example

Suresh owns a house property which has been let out by him for the whole year. Municipal value is Rs. 1,50,000; Fair Rent Rs. 1,40,000; Standard Rent Rs. 1,30,000 and Actual Rent received Rs. 1,20,000. Municipal taxes paid by the tenant Rs. 6,000. Interest on housing loan paid Rs. 3,50,000. He has income from business Rs. 5 Lakhs. Compute Income from House Property

Solution:

Gross Annual Value of the property shall be calculated first:

Higher of:

Expected Rent: Municipal Value or Fair Rent whichever is higher but restricted to Standard Rent = 1,50,000 or 1,40,000 whichever is higher but restricted to Rs. 1,30,000. Thus, Expected Rent = 1,30,000
Actual Rent= 1,20,000

Gross Annual Value= Rs. 1,30,000

Particulars	Amount in Rs.
Gross Annual Value	1,30,000
Less: Municipal taxes- Municipal taxes should have been paid by owner but in this case, tenant has paid the taxes	Nil
Net Annual Value	1,30,000
Less: Standard Deduction @ 30% Less: Interest on Housing Loan	39,000 (3,50,000)
	(2,59,000)
Income from House Property	(2,00,000)
As per Section 71(3A), House Property Loss exceeding Rs. 2,00,000 cannot be set off against other heads of income
Profits & Gains from Business or Profession	5,00,000
Gross Taxable Income	3,00,000

Note: Loss under House Property is Rs. 2,59,000 out of which Rs. 2 Lakhs have been set off against business income. Remaining loss of Rs. 59,000 can be carried forward for 8 subsequent years for being set off against Income from House Property in subsequent years.

Deductions from House Property Income

Deductions under the head of Income from House Property are allowed under section 24 of the Income Tax Act. Besides, deductions are also available under Chapter VI-A of the Income Tax Act which we will discuss in later part of this article.

Tax deductions on House Property under section 24

Standard Deduction under section 24(a)

Under section 24 of the Income Tax Act, you can claim 30% of the Net Annual Value as a deduction towards repairs & maintenance of the house property. This deduction is allowed irrespective of the actual expenditure incurred towards repairs & maintenance of the house property.

Home Loan Interest under section 24(b)

Section 24(b) allows deduction for interest on housing loan taken not only for purchase or construction of the house but also for repairs or renovation of the house property. Let’s take a deep dive into tax deduction on home loan interest

Tax benefits on interest on Home Loans

Before moving ahead, it is important to note that no tax benefit towards home loan interest is allowed in case you are opting for new tax regime. This benefit is available only for those who are opting for old tax regime.

Interest deduction in case of Let Out properties

In case you have taken a home loan for a property which has been let out/ deemed to be let out by you, then the whole amount of interest on home loan shall be deductible against the Gross Annual Value. There is no ceiling for maximum deductible amount of interest.

Interest deduction in case of self-occupied property

If the owner of the house property uses the property for own residence or his family, he can claim a deduction of an amount up to Rs. 2 lakhs on their home loan interest. However, there are certain exceptions where deduction limit will be Rs. 30,000 instead of Rs. 2 Lakhs.

Cases where interest deduction will be limited to Rs. 30,000 for self-occupied property

Case-1: Where housing loan has been taken before 1^st April 1999

Case-2: Where housing loan has been taken on or after 1^st April 1999 but the purchase or construction of house has not been completed within 5 years from the end of the FY in which the loan is availed.

Case-3: Where the housing loan has been taken on or after 1^st April 1999 for the purpose of repairs or renewal of the house property.

Pre-construction Period Interest Deduction

How do I claim a deduction for pre-construction period interest on home loan?

If house property is under construction, you cannot claim any deduction on home loan interest till completion of the construction. Such interest can be claimed only once the construction is completed.

Interest for the period from the date of taking housing loan and until the construction of house is completed is called pre-construction period. Pre-construction period can be claimed as a deduction in 5 equal installments starting from the year in which the construction of the property is completed.

Tax benefits on Home Loan Principal Repayment

Besides interest deduction, the homeowners are also eligible to get benefits against principal repayment towards home loan.

Tax Deduction on principal repayment under 80C

Under Section 80C, the home owners are eligible to claim a deduction of an amount up to Rs. 1,50,000 towards home loan principal repayment.

Tax Deduction for First-time Homeowners- Section 80EE

An individual is eligible to claim a deduction up to Rs. 50,000 under section 80EE towards interest payable on loan taken by him from any financial institution for the purpose of acquiring a residential property. But there are certain riders attached to this deduction as below:

(a) The Loan has been sanctioned between 1^st April 2016 and 31^st March 2017

(b) Amount of loan is not more than Rs. 35 Lakhs

(d) The asseessee does not own any residential house property on the date of sanction of loan

Deduction under section 80EEA for first time Homeowners

For home loans sanctioned between 1^st April 2019 and 31^st March 2022, a deduction of up to Rs. 1,50,000 is allowed under section 80EEA for interest payable on home loan taken by any individual from any financial institution.

This deduction is also subject to riders as in the case of section 80EE. The restrictions (riders) in case of section 80EEA are:

(a) The loan has been sanctioned between 1^st April 2019 and 31^st March 2022

(b) The stamp duty value of residential house property should not be more than Rs. 45 Lakhs

Do you own more than one house?

In case you own more than one house, you need to file ITR-2 form. Read more about ITR-2 form

Claiming Deduction on Home Loan

Claim of home loan deduction depends on the ownership share you have in the house property.
If there are more than one co-owner, all the co-owners are eligible to claim deduction for interest and principal repayment towards home loan.
Before making a claim for home loan deduction, don’t forget to obtain home loan Repayment certificate from the bank as your employer is going to ask you for it before allowing its benefit in Form-16.
In case you are a self-employed or freelancer, even then also Home Loan Repayment Certificate is important to get a split of principal and interest component of EMI. You are not required to enclose this certificate while filing ITR online on the IT portal. But keep it safe as the IT department might ask you for a proof of deduction after submitting the return.

Tax Benefits in Home Loans for Co-owners

Buying a home in joint ownership can be a good idea for tax planning. The joint or co-owners who are also co-borrowers of a house property can claim a deduction on interest on the home loan up to Rs. 2 Lakhs each under section 24 of the Income Tax Act. Similarly, in case of purchase of house property in joint name, section 80C deductions for principal repayment and stamp duty or registration charges is available up to Rs. 1,50,000 each to all the co-owners. This is more beneficial in case of high value properties where the home loan amount and EMI is substantial. Thus, by adding co-owners, each co-owner can take tax benefit of interest and principal repayment as per maximum threshold.

If you are co-borrower in a home loan but not the owner of the said property, you will not be entitled to tax benefits. This generally happens when the property is purchased in the name of say mother to save stamp duty but the son who is the earning member becomes the co-borrower in the home loan. Since the mother is the house owner and the son is only the co-borrower, he will not be entitled to tax benefits on home loan repayment.

Therefore, it is important to ensure these two conditions to be fulfilled for claiming tax benefits on house property:

You must be owner/ co-owner of the property
You must be borrower/ co-borrower for the home loan

It is also important that deduction towards interest and principal repayment is available only once the construction of the house property is complete.

STILL YOU FACE PROBLEMS IN FILING YOUR ITR FOR HOUSE PROPERTY INCOME

Get assisted by our team of expert income tax consultants. We will prepare your income tax return and e-file ITR within 24 hours. ITR filing plans start at just Rs. 699 and onwards.

Connect at: 9660930417 or mail at: support@taxwink.com for tax filing support.

Also Read:

Income Tax Return for Salaried Individuals

Choosing the Correct ITR Form ITR-1 or ITR-2

FREQUENTLY ASKED QUESTIONS

What is the limit of deduction on interest on housing loan?

As per Section 24, there is no limit of deduction of interest on housing loan if the property is let-out. But in case of a self-occupied property, the limit for interest deduction is Rs. 2 Lakhs. However, if the loan is taken for repairs or renovation of self-occupied property, the deduction limit is Rs. 30,000.

What is my house property income if my family is residing in the house?

If the house is occupied by you or your family for own residence throughout the year, it is considered as a self-occupied house property. The gross annual value of a self-occupied house property is considered zero. Therefore, there no income tax is payable in this case.

Can the income under the heads Income from House Property be negative?

Yes, the income under the head house property can be negative. In case of a self-occupied house property, the gross annual value is considered as ‘Nil’. If any home loan is taken for such property, interest on such loan is deductible up to Rs. 2 Lakhs thus making income from house property negative.

I own a house with two floors. On ground floor, I am running my own business and the first floor is used by me for my own residence. What will be tax implications?

Income from House property in your case will be ‘Nil’. Use of any house property for own business or profession is not covered under “Income from House Property” but under the head “Profits and Gains of Business or Profession”. Since, the first floor is used for self-residence, it will be treated as self-occupied house property.

Can a deduction of interest paid against loan taken from friends or relatives for house purchase be claimed?

Yes, there are no restrictions under section 24 from claiming interest deduction in respect of loan taken from friends or relatives for purchase or construction of house property. But is should be noted that deduction under section 80C towards principal repayment will not be allowed in this case.

Can tax benefits be claimed on housing loan interest for an under-construction property?

Yes, deduction for interest on home loan during construction period is allowable under section 24 of the Income Tax Act. However, it should be noted that such deduction is allowed in five equal installments once the construction is completed.

Can loss under house property be carried forward if belated income tax return is filed?

In most cases if you miss the deadline of ITR filing which is 31^st July (non-audited cases) or 31^st October (Audited cases), losses cannot be allowed to be carried forward to future years for set off. But, loss under the head of House property is an exception to this rule. Thus, losses under house property can be carried forward even if the income tax return filing is not done timely.

I have paid municipal taxes in respect of my flat for financial year 2021-22 in April 2023. Can I claim deduction for municipal tax payments in FY 2023-24 (AY 2024-25)?

Deduction for municipal taxes is allowed on payment basis. Since, you have paid municipal taxes for FY 2021-22 in FY 2023-24, the deduction for such tax paid will be allowed in FY 2023-24 (AY 2024-25).

Can I gift my flat to my wife to save income tax on rental income from my flat?

If you gift your flat to your wife without consideration, you will be considered as ‘Deemed Owner’ of such flat and the rental income arising from such flat will be clubbed in your income. Therefore, you will be required to pay income tax on rental income even after gifting flat to your wife.

Who is eligible to claim deduction under section 80EEA?

Deduction under section 80EEA can be claimed by individual assessees only.

Can a partnership firm, company or a trust claim benefit of self-occupied property?

No, the benefit of exemption of self-occupied property is available only to individual or HUF. The benefit of self-occupancy is not allowed to companies, firms or trusts.

Whether penal interest (interest on interest) is allowed as deduction from House Property Income?

No, penal interest is not allowed to be claimed as deduction while computing income from house property.

Disclaimer: The above article is meant for educational purposes only. Readers are therefore requested to act diligently an under consultation with any professional before applying the information contained in this article. Taxwink shall not be responsible for any loss or damage caused to any person from use of any information contained in this article. For any user support mail at: support@taxwink.com

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