Taxes on Income From House Property

A dream or a wish of owning a house one day– All of us dream of having our own house, and put our heart and soul to obtain this one day. Regardless, a lot of responsibilities come while owning a house property. And one of the major responsibilities is to pay house property taxes on annual basis.

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1. Taxes on Income From House Property

tax on house property: A dream or a wish of owning a house one day– All of us dream of having our own house, and put our heart and soul to obtain this one day. Regardless, a lot of responsibilities come while owning a house property. And one of the major responsibilities is to pay house property taxes on annual basis. Under the Income Tax Act, 1961, income rendered from the house property falls under taxation. The income yielded of any property in a year is its taxable value as well as the owner who acquires the yielded income of the property is responsible to pay the pertinent tax. If you want to understand more about how to save tax on the income from house property, then this guide will help you. A house property can be a building or a land appurtenant owned by a person that is considered as a “house property”. There are various kinds of properties included in it such as shops, factory sheds, flats, office spaces, farmhouses, and agricultural land. Moreover, It also comprises all kinds of house properties such as hotel buildings, residential houses, godowns, workshop buildings, cinema buildings, etc.

2. Types of Property

Self-occupied house property

What is self-occupied property? Self-occupied simply is a house property that is used for one’s own residential objectives. This property can be occupied by the taxpayer’s family such as parents, spouse, and children. Moreover, If any of the properties are vacant then also the income tax department will consider the property self-occupied for the purpose of Income Tax. Earlier in the financial year 2019-20, if any individual possesses more than one self-occupied house property, only one used to be considered and ministered as a self-occupied property, and the rest of the properties were supposed to be let out property. The benefit of assessing the houses as self-occupied has been increased to 2 houses since the financial year 2019-20. From now onwards, a house owner can claim his/her 2 properties as self-occupied and the rest of the house can be let out properties.

let-out property

A let-out property is a rented property by income tax. Any property that is allocated to the tenant/individual for residential or commercial objectives on rent by the owner, is considered a let-out property. When the owner of the property allocates his/her property to an individual on rent then the owner is required to register a rent agreement and the tenant is liable to pay monthly rent as noted in the rent agreement.

As per the income tax rules and regulations. let out property will be considered if the owner is obtaining any income from that rented property. The applicable income depends on the acquired amount in the form of rent. levied income tax will be either 20% or 40%. If an individual owns more the one residential house as per tax regulations (under section 23(1)(a) of the Income-tax Act, 1961) one property out of them will be considered self-acquired property.

Inherited Property

Inherited Property can be described as the property issued to a descendant upon the death/demise/extinction of a relative. Right of Inheritance is the devolution of the rights, property, debts, titles, and obligations to another individual upon the death of a person. Inherited property is like one endowed by parents, grandparents, etc again, can either be a self-occupied one or a let-out one based on its usage and objectives.

3. Deductions on Income from House Property

As per section 24, the following are the applicable deductions for Income from House Property considered: Deduction As per Section 24(a) – 30% of Gross Annual Value Deduction under Section 24(b) - interest on capital borrowed for the purpose of the purchase, construction, repair, renewal, or reconstruction of the property The interest is categorized into two categories as pre-construction and post-construction interest. The first one deals with the interest on the loan from the date of borrowing to the day of compensation, and the second is considered with the interest that is appropriate after the house is completed and is considered the interest for the relevant year. interest for Pre-construction can be accumulated and claimed for five consecutive financial years commencing the year in which the house was completely constructed. The interest on borrowed capital is calculated on a payable basis and can be claimed even if no actual interest has been paid in the particular year and it is also eligible to be claimed only by the actual person who utilized the borrowed funds for the construction purpose. If the interest on borrowed capital is payable to a non-resident of India, and there is no instance of tax paid on the same interest, such interest will not be accepted as a deduction. Moreover, brokerages and commissions on the loan/borrowed capital are not permitted as deductions, and in case the owner wants to grant a renewed loan to pay off the earlier loan, the interest on the new loan will be deductible.

4. Calculating Income from House Property

Before getting into the method of how calculating the income from house property in India, it is of utmost importance to have detailed information used for the computation. Annual Value- This is basically considered the capacity of the property to earn annually. Municipal Value- The net worth of the estimated property by the municipal authorities to levy municipal tax. Certain factors are taken into consideration that they take while finding the municipal value. Fair Rental Value- FRV or fair rental value is the rental value of the property yielded (with the same attributes and qualities in the same). Rent actually received/receivable- It is the actual amount the owner of the property has to acknowledge from the tenant regarding other attributes like who paid the electricity, water, and other utility bills. Standard Rent- As per the Rent Control Act-Standard Rent is a fixed rent by which the actual rent can not be more than the limit. In the essence, this act was created to escape tenants from eviction. Gross Annual Value (GAV)- the value uppermost among received or receivable Rent, honest market significance, and municipal valuation. On Rent Control Act is applicable, GAV is either the Standard Rent or Rent received, whichever is the highest. (NAV) Net Annual Value = Gross Annual Value (GAV) – Paid Municipal taxes. Deductions: There are two applicable levied deductions to maintain the exact calculation of the real taxable income from house property. Statutory deduction- This is the 30% of the net annual value (NAV) which is allowed for rent collection, repairs, etc. it does not matter what the real expense is. However, the deduction isn't applied as the Annual Value is 0. Interest on borrowed money- This deduction is provided based on accrual if one has borrowed money to buy or construct the house. The reduction possible is either Rs. 1, 50,000 or the actual interest amount, whichever is less. This is entitled only if the construction is completed within 3 years after 1 April 1999. In other cases, the deductible amount is Rs. 30,000 or actual interest, whichever is less. Annual Value: Actual Value – Net Annual Value (NAV) Deduction.

Particulars
Gross Annual Value -
Computational Note INR
Fair Rent (Rs. 25000*12) 3,00,000
Municipal Value (Rs. 22000*12) 2,64,000
Higher of 1 or 2 3,00,000
Standard Rent (Rs. 30000*12) 3,60,000
Expected Rent (lower of 3 or 4) 3,00,000
Rent Received/Receivable (Rs. 20000*12) 2,40,000
Net annual worth will be higher of 5 or 6 3,00,000
Less Municipal Tax -
Less Statutory Deduction -
Less Interest on Borrowed Capital -

Best possible way of describing how an income from house property is calculated is through an example scenario. Mr. Amit (A) and Mr. Akash (B) have been friends since childhood. They later got a suitable job and decided to own a house together. Mr. Amit (A) and Mr. Akash (B) have applied for a loan and started the construction of the house. The house took around a year the completion and become the bona fide co-owners of the property. After they provide their reasonably large house on rent out the first floor while sharing the ground floor for themselves. The scenario for the annual value of the house becomes therefore Mr. Amit (A) and Mr. Akash (B) will have to pay taxes for the annual amount of Rs.1,26,000. However, the amount of levied tax will be divided equally between them, since they are co-owners of the building with the ground and first floors. Although both the floors are present as property, still only the first floor will be taken into the consideration for calculating the annual value of the income from the house property. In case A and B had been staying in non-owned houses at different locations, the annual value of the above-mentioned house would have been equal to zero.

Frequently Asked Questions

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How much income from house property is taxable?

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The 30% of gross income house property is deductible if the property is let out in the previous year.


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How can I save tax from my rental income?

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You can save tax on your rental income by deducting eligible expenses from your rental income such as advertising, Insurance Premiums, etc.


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What is the maximum limit to claim HRA?

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You can not claim a full rental amount as a salaried individual, as well as you are not allowed to claim more than 50% of the basic salary.


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Do I need to declare rental income?

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Yes. You must declare the income from a rental property in the self-assessment tax return each year.


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Can I claim HRA without the rent agreement?

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Yes. If your house rent allowance is up to Rs. 3,000 then you can claim it without any rent agreement.


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Who is eligible for a house rent allowance?

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Most of the salaried employees are eligible for a house rent allowance. If you stay in a rental accommodation then as per section 10(13A) of the income tax act.


CEO Krishna Gopal

Krishna Gopal Varshney co-founder & CEO of Myitronline.com. Myitronline is amongst the top emerging startups of Asia and authorized ERI by the Income Tax Department. A dedicated and tireless Expert Service Provider for the clients seeking tax filing assistance and all other essential requirements associated with Business/Professional establishment. Connect to us and let us give the Best Support to make you a Success. ”

Krishna Gopal Varshney
Co-founder & CEO