The rent received from any property is the income under head House property under section 22 of the income tax act,1962.
Income under house property can be in any of the following ways:
- Rental income from let out of property
- Annual value of property which is deemed* to be let out for income tax purposes
- Annual Value of the property which is self occupied which is Nil
*For income tax purposes if a person owns more than one house property then it is deemed to be let out of all properties except any one.
Gross Annual value of a house property is the notional rent which could be received if the property is let out. The income under head house property is always calculated as per the Annual value of the property as calculated under section 23 of the act.
Deductions Allowed From the Income under Head House Property
There are 2 deductions allowed from the income of house property which are:
1) Municipal Tax
2) Deductions under section 24
1) Municipal Taxes
Municipal taxes which are actually paid are allowed as deduction from Gross annual value. This deduction is allowed on actual payment of the taxes. No one can avail this deduction on due basis. Actual payment is mandatory for availing this deduction. Net Annual Value is Gross annual value less Municipal taxes paid.
2) Deductions U/s 24
Section 24 deductions are allowed from Net annual value as calculated above. There are two deductions under section 24:
- Let out Properties: Standard deduction is 30% of the Net annual value. This 30% deduction is for the expenditure incurred on insurance, repair & maintenance, electricity, water supply or any other expenditure which you may have incurred. This is flat deduction of 30% i.e. actual expenditure may be high or less this 30% deduction can be claimed by everyone.
- Self- Occupied Properties: But in case of self occupied house property, since the annual value is Nil, standard deduction is also Nil. The income under head house property cannot be negative because of standard deduction.
Interest on Borrowed Capital Deduction
- Let out Property: If you have taken a home loan for construction, purchase, repair, renewal or reconstruction of your house property, the interest paid on that loan is allowed as deduction under this section. Deduction for interest on loan is allowed on due basis i.e. actual payment is not necessary for claiming this deduction unlike municipal taxes. So every individual should keep on claiming this deduction for each year the interest is due irrespective of actual payment. There is no deduction allowed for any brokerage and commission paid for arranging this loan.
- Self Occupied Property: In case of self occupied also this deduction is allowed and due to which one may have loss under head house property. The maximum amount of deduction allowed in such a case is Rs.2,00,000 w.e.f. AY 2015-16. In case of let out or deemed to be let out property, the entire interest is allowed as deduction. This is the deduction which could be claimed after completion of construction of house property.
A.Y.2020-21: The provisions has been amended to exempt notional income pertaining to 2 self-occupied residential house properties. The following provisions will be applicable from A.Y.2020-21 as follows:
- If a person occupies only one house property for his own residential purposes, annual value of such property will be nil (as earlier). Interest on borrowed capital will be deductible up to Rs. 2,00,000 (subject to a few conditions).
- If a person occupies 2 house properties for his own residential purposes, annual value of both the properties will be taken as nil. Aggregate interest on capital borrowed for the purpose of purchase/construction of these properties, will be deductible up to Rs.2,00,000 (subject to similar conditions as were applicable earlier).
- If a person occupies more than two house properties for his own residential purposes, only two properties (according to his own choice) will be treated as self-occupied properties and other houses will be “deemed to be let out”. In the case of two self-occupied properties (as selected by the assessee), annual value will be nil and aggregate interest on borrowed capital will be deductible up to Rs.2,00,000 (sub ject to similar conditions as were applicable earlier). In the case of “deemed to be let out” properties, taxable income will be calculated as if such properties are let out properties.
Deduction for interest on housing loan taken during 1st April 2016 to 31st March 2017 from a bank/housing finance company, can be availed u/s 80EE upto a maximum of Rs.50,000 subject to specified conditions. See more about deduction under section 80EE. Please note that such interest, if claimed as deduction u/s 80EE shall not be deductible against income from house property.
Pre-Construction interest: Pre-Construction is also allowed to be claimed as deduction from the income under head house property. This interest is only allowed when the loan is taken for purchase or construction of a house property i.e. interest of pre-construction period is not allowed in case of loan taken for repair, renewal etc purposes. This deduction is allowed in 5 installments starting from the year in which the construction of house property is completed.
For Example: The construction of house is completed on 9 Oct 2012, you can claim 1/5th of interest paid till 31 March 2012 in FY 2012-13.
In case of self- occupied property the total amount including pre-construction period interest should not exceed Rs.2,00,000.
Conditions for Claiming Deduction of Interest on Home Loan
The conditions for claiming deduction are:
- Loan has been taken after 1 April 1999
- Loan must be taken for purchase or construction
- The acquisition or construction is completed within 3 years from the end of the financial year in which the loan was taken
- There is interest certificate available for the interest payable on the loan
For claiming Rs.2,00,000 as deduction all of the above conditions need to be fulfilled. This deduction may be limited to Rs.30,000 in case any of the above conditions are not fulfilled i.e. loan taken before 1-4-1999 or for the purpose of repair, maintenance, reconstruction or renewal or the construction is not completed within 3 years.
Some Other Points to be Considered
- Interest on interest is not deductible. The interest payable on borrowed capital is deductible only.
- In case the municipal taxes are borne by the occupier, then no deduction of Municipal taxes.
- Where the new loan has been taken for the repayment of old loan, this new loan is merely used for repayment of original loan, then interest on new loan is allowed as deduction.
Recommended Read: Income From House Property: Deductions & Tax Planning
Effects of Budget 2017
In case of self occupied property as the annual value is Nil, but the interest payable on loan is allowed as deduction so there is always a loss under head House property. This loss is allowed to set off from the income from any other head.
As per the new sub-section (3A) inserted in section 71 in Finance Act 20018, there is restriction on the maximum amount of loss under head House Property that can be set off from income of other head. From FY 2017-18, loss of a maximum of Rs.2,00,000 is allowed to be set off with income of any other head and the loss which is not set off is not allowed to be carried forward to future years.
Mr. P has let out a house property. The rental income of Mr. P is Rs.50,000 p.m. His income under other heads is Rs.15,00,000. The municipal taxes paid during the year are Rs.20,000. He is also paying interest of Rs.8,00,000 p.a on home loan. Deductions under section 80C are Rs.1,50,000.
Calculation of Income under head House property
|FY 2016-17||FY 2017-18|
|Less: Municipal Taxes Paid||20,000||20,000|
|Net Annual value||5,80,000||5,80,000|
|Less: Standard Deduction @ 30%||1,74,000||1,74,000|
|Less: Interest Payable on loan||8,00,000||8,00,00|
|Loss from house property eligible for set off||(3,94,000)|
Subject to max limit allowed as per Budget 2017
Calculation of Total income and Tax liability
|FY 2016-17||FY 2017-18|
|Income from other heads||15,00,000||15,00,000|
|Loss under head house property||(3,94,000)||(2,00,000)|
|Less: Deductions u/s 80C||1,50,000||1,50,000|
|Total Taxable income||9,56,000||11,50,000|
|Tax Liability (inclusive of cess)||1,19,686||1,62,225|
There is increase in tax liability by Rs.42,539 due to two major changes in Budget 2017 that are:
- Decrease in slab rate from 10% to 5% for income between Rs.2,50,001 to Rs.5,00,000
- Maximum amount of loss of house property to be set off restricted to Rs.2,00,000.
About the Author
Arpit Goyal is pursuing CA and B.com & also working as an article assistant in Gurgaon. He has an immense interest in Taxation. He loves to use technology to spread knowledge about taxation & accounts.