Income Tax Rules on Income From House Property: You Must Know

Income from house property is one of the major sources of income for many taxpayers in India. However, most taxpayers are not aware of the income tax rules related to income from house property, and as a result, they end up paying more tax than they should. 

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.

In this article, we will talk about the income tax rules that you must know to minimize your tax liability. So without further ado, let’s get started.

What Is Income From House Property?

Income from house property is the income earned by an individual by renting out their house property. The income from the house property includes rent received, as well as any income earned from the property if it is used for any other commercial purpose.

Under the Income Tax Act, of 1961, income rendered from the house property falls under taxation. The income yielded by any property in a year is its taxable value, as well as the owner who acquires the yielded income of the property, is responsible for paying the pertinent tax.

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 possessed 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.

Income Tax Rules Related To Income From House Property

• Calculation of income from house property

The income from the house property is calculated by deducting the municipal taxes paid and the standard deduction of 30% from the annual value of the property. The annual value of the property is calculated based on the market value of the property, the rental value of the property, and the actual rent received, whichever is higher.

• Deduction of interest paid on home loan

If you have taken a home loan to buy or construct a house property, you can claim a deduction of up to Rs. 2 lakhs on the interest paid towards the loan u/s 24 of the I-T Act. If the house property is let out, there is no limit on the amount of interest that can be claimed as a deduction.

• Deduction of principal repaid on home loan

A deduction of up to Rs. 1.5 lakhs can be claimed on the principal amount repaid on a home loan u/s 80C of the Income Tax Act. This deduction is available only if the home loan has been taken for the purchase or construction of a residential property.

• Deduction of property taxes paid

You can claim a deduction of property taxes paid on the house property under section 24 of the Income Tax Act. The deduction is allowed for the actual amount of property taxes paid during the financial year.

• Income tax on deemed rent

If you own more than one house property, and all the properties are not let out, then the tax on the notional rent of the unoccupied property has to be paid. The notional rent is calculated based on the market value of the property, and the tax has to be paid on this amount.

• Joint ownership of house property

If you jointly own a house property with your spouse or any other person, then both the owners can claim a deduction of up to Rs. 2 lakhs on the interest paid towards the home loan. However, the deduction of principal repayment is limited to Rs. 1.5 lakhs is available only to the person who has taken the loan.

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 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.

Conclusion

Summing it up, Income from house properties is an important source of income for many taxpayers in India. However, to reduce your tax liability, it is important to be aware of the income tax rules related to income from house property. By taking advantage of the deductions available under the Income Tax Act, you can reduce your tax liability and save money. 

Frequently Asked Questions–

• Do I need to declare rental income?

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

• Can I claim HRA without the rent agreement?

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

• Can a person claim a deduction for both interests paid on a home loan and municipal taxes paid during the financial year?

Yes, a person can claim a deduction for both interest paid on a home loan and municipal taxes paid during the financial year. The deduction for interest paid on a home loan is available under Section 24 of the Income Tax Act, while the deduction for municipal taxes paid is available under Section 24(a) of the Income Tax Act.

• Can a person claim a deduction for repair and maintenance expenses incurred on a property?

Yes, a person can claim a deduction for repair and maintenance expenses incurred on a property. However, the deduction is limited to the extent of the actual amount spent on repair and maintenance.

• Is it mandatory to file an income tax return if a person has income from house property?

Yes, it is mandatory to file an income tax return if a person has income from house property. The income from house property is considered taxable income and needs to be declared in the income tax return.

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