How to calculate Income from House Property? – [Section 24, 80C and 80EE]
This article will be helpful to all those who own a residential property and are receiving rent from it (Income from House Property). This article will address following issues:
- how rent income will be calculated and taxed and,
- how to save tax on income from house property
- Income from House Property
- Deductions under section 24
- How to Save Tax on Income from House Property
Income from House Property
Under Income Tax Law, any income arising from letting out of a owned house property, being any buildings or lands appurtenant thereto, is charged under the head “Income from House Property” under section 22 of the Income Tax Act, 1961. However, property used for the purpose of business is excluded for computation of house property income.
The prerequisites for taxing income under head House Property are:
– Property must consist of buildings or or land belonging to building.
– Tax Payer must be the owner of the property
– Property must not be used by owner for his business or profession.
Computation of Income from House Property
The house property income is computed as under:
To start with computation of house property income, gross annual value is to be calculated first.
Gross Annual Value (GAV)
Why ‘gross annual value’ is calculated to compute income from house property?
The answer to this is that tax on house property is not on actual rent but on underlying capacity of building to generate income. In other words, how much rent the property can fetch. Through Gross Annual Value, taxable income from house property is calculated.
Before calculating Gross Annual Value (GAV), following terms needs to be explained.
Fair Rent (FR) : Fair rent is the rent which similar properties in the same locality might reasonably fetch.
Municipal Valuation (MV) : For collecting municipal taxes, local authorities surveys and value buildings. This valuation is taken as evidence in determining the earning potential of the building.
Standard Rent (SR) : Standard rent is derived from rent prescribed under Rent Control Act.
Expected Rent : The reasonable expected rent is the sum for which a property might reasonably expect to be let out from year to year. It is derived as higher of Municipal Valuation (MV) and Fair Rent (FR) but subject to Standard Rent (SR).
Unrealized Rent : Rent which cannot be realized by the owner is unrealized rent.
Loss due to vacancy : Its a notional loss of rent incurred by owner due to vacancy of the property.
Actual Rent received or receivable : It is the actual amount of rent received by the owner from the tenants.
Gross Annual Value is determined as under:
Gross Annual Value of House property held as stock in trade
A new subsection (5) of section 23 has been inserted vide Finance Act, 2017, w.e.f. 01/04/2018. It states that where the house property held as stock in trade is not let out during the whole or any part of the financial year, then annual value of such house property shall be taken as nil. However, this benefit is only available for 1 year from the end of financial year in which the certificate of completion is obtained from the competent authority. (from A.Y. 2018-19)
Deductions under section 24
There are two types of deductions available to tax payer under section 24 :
- Standard Deduction – 30% of the Net Annual Value is straight away deducted from Net Annual Value. This deduction is irrespective of any other expenditure incurred by the tax payer.
- Interest on Borrowed Capital – i.e. Interest on loan is also allowed as deduction on accrual basis if taken for purchase, construction, repair, renewal or reconstruction of house property.
Note : Interest of pre-construction period is also allowed as deduction in five equal installments, commencing from previous year in which the house is acquired or constructed.
Mrs. Twinkle owns a residential property in Mumbai. She earned ₹ 12,36,000 as a rent from it in Financial Year 2017-18. The Municipal Valuation (MV) is ₹ 9,60,000, Fair rent (FR) is ₹ 10,08,000 and Standard Rent (SR) under Rent Control Act is ₹ 8,40,000. However, out of ₹ 12,36,000, unrealized rent is ₹ 1,03,000. Further, she has paid interest of ₹ 3,60,000 on loan taken on this property and municipal tax of ₹ 60,000. What is the Income from House Property of Mrs. Twinkle for Assessment Year 2018-19 (FY 2017-18).
Computation of Mrs. Twinkle’s Income from House Property:
First we have to calculate Gross Annual Value (GAV):
Now, we will calculate Income from House Property:
Therefore, Mrs. Twinkle Income from House Property is ₹ 3,91,100. She will pay income tax on this amount.
How to Save Tax on Income from House Property
There are several tax benefits on taking home loan for residential property. The first and foremost is in the form of deduction of interest on loan under section 24. The pre-condition for availing this benefit is that loan must be taken for the purpose of purchase, construction, repair, renewal or reconstruction of house property.
If loan is taken for property which is self-occupied, then maximum deduction of interest is ₹ 2,00,000. As the Gross Annual Value of self-occupied property is Nil, this amount will ultimately lead to loss from house property and can be adjusted against any other head of income including House Property. This limit ₹ 2,00,000 is only for self-occupied house property and not for properties which are let out.
However, if the house property is not occupied by the owner because of his place of employment, business or profession and he is residing at some other place, then limit of deduction is capped at ₹ 2,00,000/-.
Section 80C – Principal Repayment Deduction
Section 80C provides for deductions from gross total income in respect life insurance, provident fund, National Saving Certificate, tuition fees, equity oriented mutual funds, fixed deposits scheme, Senior Citizens Saving Scheme etc. In addition to this, 80C also offers deduction in respect of repayment of housing loan take for purchase or construction of residential property.
Amount 0f deduction
Maximum amount qualified for deduction under section is ₹ 1,50,000. The deduction in respect of repayment of housing loan also falls under this limit. In other words, if taxpayer had made repayment of ₹ 3,00,000 towards principal, he can claim deduction only up to ₹ 1,50,000 under section 80C.
The taxpayer can also claim deduction stamp duty, registration charges and other expenses incurred for transfer of house property in his name subject to maximum limit of ₹ 1,50,000.
Note: However, if the taxpayer transfers the house property before 5 years, then all the deduction already taken in previous years will be deemed as income in which the house property is sold.
Section 80EE – Deduction in respect of interest on loan taken for residential house property
Deduction under section 80EE in respect of interest on housing loan is available subject to fulfillment of following conditions:
- Taxpayer is an resident or non-resident individual
- Loan is taken for purchasing residential house property
- Loan is taken from bank or housing finance company
- Loan is sanctioned between 1/04/2016 and 31/03/2017
- Amount of loan sanctioned does not exceed ₹ 35 Lakh
- Value of residential house property does not exceed ₹ 50 Lakh
- The taxpayer does not own any other residential house property on date of sanction of loan.
Amount of Deduction
If all the conditions are satisfied, then deduction available is amount of interest payable or ₹ 50,000 whichever is less. The deduction under section 80EE is available from Assessment Years 2017-18 and on wards. However, double deduction is not possible. This means that, if you have claimed deduction of interest under this section, then you won’t be allowed to claim deduction under section 24 for the same amount of interest.
If you have any doubt regarding taxation of Income from House Property, please comment below. We’ll be happy to address your concern.