Income from House and Property

The term “house property” includes any building or land appurtenant thereto, owned by the taxpayer and used for residential or commercial purposes. It covers a wide range of properties, including residential houses, apartments, commercial buildings, shops, offices, warehouses, and vacant land. Income from house property may arise from rental income, self-occupied property, deemed let-out property, or capital gains from the sale of property.

When a property is used for the purpose of business or profession or for carrying out freelancing work – it is taxed under the ‘income from business and profession’ head. Expenses on its repair and maintenance are allowed as business expenditure.

1. Self-Occupied House Property

A self-occupied house property is used for one’s own residential purposes. This may be occupied by the taxpayer’s family parents and/or spouse and children. A vacant house property is considered as self-occupied for the purpose of Income Tax.

Prior to FY 2019-20, if more than one self-occupied house property is owned by the taxpayer, only one is considered and treated as a self-occupied property and the remaining are assumed to be let out. The choice of which property to choose as self-occupied is up to the taxpayer.

For the FY 2019-20 and onwards, the benefit of considering the houses as self-occupied has been extended to 2 houses. Now, a homeowner can claim his 2 properties as self-occupied and remaining house as let out for Income tax purposes.

2. Let Out House Property

A house property which is rented for the whole or a part of the year is considered a let out house property for income tax purposes

3. Inherited Property

An inherited property i.e. one bequeathed from parents, grandparents etc again, can either be a self-occupied one or a let out one based on its usage as discussed above.

Deductions Allowed:

From the annual value of the property, certain deductions are allowed under Section 24 of the Income Tax Act to arrive at the taxable income from house property. These deductions include:

• Standard deduction: A flat deduction of 30% of the annual value is allowed towards repairs, maintenance, and other expenses.
• Interest on housing loan: Deduction is allowed for interest paid on a loan taken for the purchase, construction, repair, or renovation of the property. The maximum deduction allowed is Rs. 2 lakh for self-occupied properties and the actual interest paid for let-out or deemed let-out properties.

Treatment of Losses:

If the net annual value of a property (after allowing deductions) results in a loss, such loss can be set off against income from other heads, such as salary, business income, or capital gains, in the same financial year. Any unadjusted loss can be carried forward for up to eight subsequent years and set off against income from house property in those years.

Taxation of Deemed Let-Out Property:

If a property is not let out or self-occupied but deemed to be let out, it is treated as let-out for taxation purposes. This provision applies when an individual owns more than one house property and chooses to occupy only one property for self-use. In such cases, the other property/properties are deemed to be let out, and income is calculated accordingly.

Taxation of Vacant Property:

Even if a property is vacant and not yielding any rental income, it is still considered to have an annual value for tax purposes. The owner is required to pay tax on the deemed rental income, which is calculated based on the fair market rent that the property would fetch if let out. However, deductions for interest on housing loan and standard deduction are still allowed.

Steps to Calculate Income from House Property

• Determine Gross Annual Value (GAV) of the property:

The gross annual value of a self-occupied house is zero. For a let out property, it is the rent collected for a house on rent.

• Reduce Property Tax:

Property tax, when paid, is allowed as a deduction from GAV of property.

• Determine Net Annual Value (NAV):

Net Annual Value = Gross Annual Value – Property Tax

• Reduce 30% of NAV towards standard deduction:

30% on NAV is allowed as a deduction from the NAV under Section 24 of the Income Tax Act. No other expenses such as painting and repairs can be claimed as tax relief beyond the 30% cap under this section.

• Reduce home loan interest:

Deduction under Section 24 is also available for interest paid during the year on housing loan availed.

• Determine Income from house property:

The resulting value is your income from house property. This is taxed at the slab rate applicable to you.

• Loss from house property:

When you own a self occupied house, since its GAV is Nil, claiming the deduction on home loan interest will result in a loss from house property. This loss can be adjusted against income from other heads.

Note: When a property is let out, its gross annual value is the rental value of the property. The rental value must be higher than or equal to the reasonable rent of the property determined by the municipality.