Deductions from Annual Value

Taxpayers should be aware that for every house property owned by them, income tax is payable on a yearly basis. The tax payable is calculated as a percentage of the net annual value of the property. The net annual value is determined based on the approximate amount of annual rent which the property can be expected to fetch in the market at an arms’ length price. Each and every house property owned by a taxpayer is taxable, with the exclusive exception of self-occupied residential properties. Even in the case of self-occupied residential properties, the exemption from taxability is given only for one self-occupied property. 

According to Section 24 of the Income Tax Act, “the Income from House Property shall be reduced by the amount of interest that is paid on Loan where the loan has been taken for the purpose of purchase, construction, renewal, repair or reconstruction of property”. The following deduction from Net Annual Value (NAV) is permissible to determine the taxable income from house property:

• Deduction at 30% on NAV under Section 24(a).
• Interest on loan under Section 24(b) if the loan is taken for purchases, construction, repair or reconstruction of House Property.

Calculating Net Annual Value Deduction

The Net Annual Value of the house property deduction can be divided into two scenarios:

Let-out House Property

In this case, Net Annual Value can be deducted under two sections:

• The standard deduction under Section 24(A)
• Interest on money borrowed under Section 24(B).

Self-occupied House

In this case, the Net Annual Value can be deducted from the interest on money that is borrowed under Section 24(B).

Section 24(A)

Section 24(a) deals with the standard deduction of the Net Annual Value. It is a deduction made out of the Net Annual Value for some expenses of the owner of the house property that is connected with the rental income. The rental income includes charges like rent collection charges, insurance of house, repair of the house, and so on. All these charges will be deductible at 30% of NAV.

Self-occupied house property does not require standard deduction because there is no NAV for a self-occupied house. In simple terms, the standard deduction for a let out house or for a deemed let outhouse is 30% of Net Annual Value. On the other hand, there is no deduction for a self-occupied house.

Section 24(B)

Section 24(B) deals with the purchases of items in connection with the construction or repair of a house property. For this section to be applicable, the owner of the house property has to avail a housing loan through which the transaction for the purchase, construction, repairs or renovation of the house of completed.

In such cases, the interest paid for the housing loan is used for the deduction of NAV at the time of calculating the house property income. There is no maximum limit for let out house property/deemed let out house property. For a self-occupied house, there is a maximum limit up to which the interest can be claimed for deduction.

Computation of Self-occupied House Property

Section 24(2)

When the property consists of a house or part of a house which is in the owner’s occupation for the purposes of his own residence or cannot be owned by the owner by the reason of fact that owing to his employment business or profession carried on at any other place, the owner has to reside at that other place in a building that is not belonging to him. The annual value of the house or part of the house would be considered as nil.

Section 23(3)

The annual value of the self-occupied house would not be taken as nil to the below conditions:

• If the house of part of the house which is actually let during the whole or any part of the previous year; or 
• Any other benefit that is derived by the owner from such a house.

In the above cases, the annual value would be determined as per provisions applies for the let out properties.

Section 23(4)

If there is more than one residential house, that is in the employment of the owner for his residential purposes then the owner might exercise an option to treat any one of the houses to be self-occupied. The other house would be deemed to be let out and the annual value of such houses will be determined as per the following Section 23(1)(a). The assessee, in this case, must exercise his option in a way that his taxable income is the minimum. Such an option would be changed from year to year. If an assessee has a house property that consists of two or more residential units and all such units are self-occupied, then the annual value of the entire house property would be considered as nil as there is only one house property though it has more than one residential units.

As per the amendments in income tax law made by the Finance Act, 2019, the benefits under Section 23(2) is to be allowed for two self-occupied houses instead of one. If there are more than two residential houses, that are in the occupation of the owner of his residential purposes then the owner may exercise an option to treat any two of the houses to be self-occupied. The other houses will be determined as per Section 23(1)(a). The annual value of two self-occupied houses opted by the assessee can be taken as nil.

Deduction in respect of one Self-Occupied House

When the annual value is nil, the assessee will not be allowed for the standard deduction of 30%. However, the assessee will be granted deduction on account of interest as under:

• If capital is borrowed, then the maximum amount of deduction on account of interest would be Rs.30,000  (not Rs.2 lakhs).
• The acquisition or construction must be completed within 5 years from the end of the financial year in which the capital was borrowed. The construction of the residential unit to have commenced before April 1, 1999. 
• The aforesaid three conditions are satisfied, the higher deduction of Rs.2 lakhs would be available.

 Section 23(5) 

Where the house property consisting of any land or building appurtenant thereto are held as stock-in-trade and the property or any part of the property is not let during the whole or any part of the previous year. Then the annual value of house property or part of the house, for the period up to 1 year from the end of the financial year in which the completion certificate of construction of the house property is taken from the competent authority, shall be taken to be nil.