Owning a house is a significant milestone for many Indians. However, it's important to understand how the income generated from house property impacts your taxes. The Indian Income Tax Act, 1961, lays down specific rules on how such income is taxed. This guide will help you understand everything you need to know about "Income from House Property" under Indian tax laws.
What is Income from House Property?
Income from House Property refers to the rental income earned from owning a house or building, even if the property is not rented out. It includes any residential or commercial property owned by an individual, excluding those used for business or professional purposes.
Under the Income Tax Act, of 1961, the property owner must pay tax on the potential rental income, which is considered taxable under the heading 'Income from House Property.'
How is Income from House Property Calculated?
To calculate the Income from House Property, you need to determine the Gross Annual Value (GAV) of the property. This value is the higher of the following:
- Actual Rent Received or Receivable: The rent amount you actually receive or are entitled to receive from your tenant.
- Fair Rent of the Property: The estimated rental value is based on similar properties in the same locality.
- Municipal Value of the Property: The value determined by the local municipal authorities for property tax purposes.
- Standard Rent: The maximum rent that can be legally charged, as per the Rent Control Act.
Net Annual Value (NAV) is obtained after deducting municipal taxes paid from the GAV. The final taxable income is calculated after allowing standard deductions and interest on loans, if applicable.
Types of House Properties
The taxation of Income from House Property depends on the type of property. The Income Tax Act recognizes the following types:
1. Self-Occupied House Property (SOP)
A property used by the owner for residential purposes. No income is generated from this property, and its Gross Annual Value is considered to be zero. However, deductions are available for the interest on a home loan.
2. Let-Out House Property (LOP)
A property rented out for residential or commercial use. The actual rent received or receivable forms the basis for calculating Income from House Property.
3. Deemed to be Let-Out Property
If a person owns more than two properties, only two of them can be treated as self-occupied. The rest are deemed to be let-out, even if they are not actually rented. The notional rent, based on market rates, is considered as income.
Deductions under Income from House Property
To reduce your taxable income, you can avail of the following deductions:
1. Standard Deduction (Section 24(a))
A standard deduction of 30% of the Net Annual Value (NAV) is allowed. This is to cover maintenance costs, repairs, and other expenses related to the property. This deduction is available regardless of the actual expenses incurred.
2. Interest on Home Loan (Section 24(b))
Interest paid on a home loan for the purchase, construction, or repair of the property can be claimed as a deduction. The limit is up to ₹2,00,000 for a self-occupied property if the loan was taken after April 1, 1999. There is no upper limit on the deduction for a let-out property.
3. Municipal Taxes
Municipal taxes paid by the owner to the local authority are deductible from the Gross Annual Value (GAV) to compute the Net Annual Value (NAV). However, these taxes must have been paid during the financial year to be eligible for deduction.
Tax Implications of a Jointly Owned Property
If a property is owned jointly, the Income from House Property is divided among the co-owners. Each co-owner must include their share of income in their tax returns. The share is determined based on the ownership percentage mentioned in the property deed.
Exemptions and Tax Benefits for Housing Loan Borrowers
1. Section 80C Deduction
Apart from the deductions under Section 24(b), you can also claim a deduction under Section 80C for the principal repayment of a home loan.Section 80C sets a maximum limit of ₹1,50,000.
2. Additional Deduction Under Section 80EE
For first-time homebuyers, an additional deduction of up to ₹50,000 is available under Section 80EE for the interest paid on a home loan. This is over and above the deductions available under Section 24(b) and 80C.
Tax Treatment of Arrears and Unrealized Rent
1. Arrears of Rent
If you receive arrears of rent in a financial year, it is taxable in the year of receipt under Section 25A. However, a standard deduction of 30% is available on such arrears.
2. Unrealized Rent
Unrealized rent is the portion of rent that has not been received from the tenant. If certain conditions are met, such as the tenant vacating the property or being declared insolvent, this amount is deductible from the Gross Annual Value.
3. Tax Treatment of Joint Ownership
For jointly owned properties, the income is divided according to the ownership share specified in the property deed. Each co-owner must report their share of the income in their tax returns. The Income Tax Act allows for the apportionment of deductions, like the interest on a home loan, among co-owners based on their share of ownership.
Also Read: Presumptive Taxation Scheme: Who Qualifies And How It Works
Tax Treatment of a Property Under Construction
If you own a property that is under construction, it is generally not considered as generating any income until construction is completed and the property is ready to be occupied or rented out. However, if a property is under construction and you are paying interest on a home loan, you can claim a deduction for the interest under Section 24(b). This deduction is available in the year when the construction is completed, but the total deduction for the pre-construction period is limited to ₹2,00,000.
Implications of Notional Rent for a Property Vacated
For properties that are vacated or not rented out, notional rent may be considered for tax purposes. The Income Tax Act assumes that such properties are let-out and includes a notional income based on market rent rates. This notional rent is treated as income and is taxable. This rule applies particularly when you own more than two properties and the excess properties are deemed to be let-out.
Legal Provisions for Properties Used for Business
Properties used for business or professional purposes are not covered under the "Income from House Property" head. Instead, income from such properties should be reported under "Income from Business or Profession." The tax treatment for these properties involves different rules, and expenses related to their maintenance and operation can be claimed as deductions under business income.
Discrepancies and Reconciliation
If there are discrepancies in the reported income from house property, such as errors in the calculation of Gross Annual Value or deductions, it is crucial to reconcile these figures. Discrepancies may arise due to incorrect reporting or missed deductions. Ensure all calculations are accurate and review your returns thoroughly before submission. If needed, consult with a tax professional to address and correct any issues. Special Cases and Exemptions
Certain properties may qualify for special exemptions or have unique tax implications. For instance, properties in Special Economic Zones (SEZs) might have different tax treatments. Be aware of any additional exemptions or rules that apply to your specific case, such as properties owned by trusts or charitable organizations, which might be subject to special provisions under tax laws.
How to Report Income from House Property in Your Income Tax Return (ITR)?
When filing your Income Tax Return (ITR), you must report Income from House Property under Schedule HP. The following steps should be followed:
- Compute the Gross Annual Value (GAV): Sum up the rent received or receivable.
- Deduct Municipal Taxes: Subtract the municipal taxes paid during the year.
- Calculate the Net Annual Value (NAV): This is the GAV minus municipal taxes.
- Apply Deductions: Include standard deductions (30% of NAV) and interest on home loans (as applicable).
- Report the Income: Enter the final taxable amount under the head 'Income from House Property' in your ITR.
Common Mistakes to Avoid When Filing for Income from House Property
- Not considering municipal taxes: Forgetting to deduct municipal taxes from the GAV can lead to a higher taxable income.
- Incorrectly reporting self-occupied properties: If you own more than two properties, ensure you correctly classify them to avoid errors.
- Not claiming deductions for housing loan interest: Ensure you claim the maximum allowable deductions for interest paid on home loans.
- Omitting arrears and unrealized rent: Always account for arrears and unrealized rent correctly to comply with tax laws.
Also Read: Who Needs an Income Tax Clearance Certificate? How to Get it
Conclusion
Understanding Income from House Property is crucial for every property owner in India. It ensures that you pay the correct taxes while also availing all eligible deductions. Proper knowledge can help reduce your tax burden and increase savings. Always stay informed and consult a tax professional if needed.
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