Tax liability: The taxability may arise in the hands of a taxpayer for the property owned by him, whether it is used as his own residence or has been let out or even in cases
Tax liability: The taxability may arise in the hands of a taxpayer for the property owned by him, whether it is used as his own residence or has been let out or even in cases

Taxability of house property income

The taxability may arise in the hands of a taxpayer for the property owned by him, whether the same is used for the purpose of his own residence or the house property has been let out on rent or even in cases where it is left vacant

Income from house property’ is one of the five heads of income under which income arising from a ‘house property’ is liable to tax under the Income-Tax Act, 1961. As per definition under the Act, a ‘house property’ consists of any building or land appurtenant thereto, which is owned by a taxpayer. Such a building may be used for commercial or residential purposes. However, this excludes a property which is used for the purpose of carrying out the taxpayer’s business or profession, the profits of which are chargeable to income-tax.

The taxability may arise in the hands of a taxpayer for the property owned by him, whether the same is used for the purpose of his own residence or the house property has been let out on rent or even in cases where it is left vacant. Therefore, it is important to understand the applicable provisions as per the current tax law.

Income from house property is broadly computed as under:

Gross annual value (GAV)

Less: municipal taxes paid during year

Net annual value (NAV)

Less: standard deduction @30% (under Section 24(a) of the Act)

Less: interest on housing loan (under Section 24(b) of the Act)

Taxable income from house property

Determining the amounts under each of the above steps is important to ensure that the taxable income is computed correctly.

Determination of GAV

GAV refers to the rent that the property is expected to get in the market or the actual rent earned from the property. GAV is determined differently for a property let out on rent and a property that is being occupied by owner for himself.

Property let out on rent

In case of a property let out on rent during the year, GAV would be calculated as higher of the following:

• Sum for which the property may be might reasonably be expected to be let out; or

• Actual rent received or receivable from the let-out property

As an exception, in case the actual rent is less than the expected rent due to the property being vacant for part of the year, then the actual amount received/receivable would be considered as GAV.

Property used for ‘self-occupation’ or considered as ‘deemed to be let-out’

As per the Act, a property is considered as ‘self-occupied’:

• Where the house property is occupied by the owner for his own residence; or

• Cannot be actually occupied because of having employment/business at other place and the taxpayer is residing at that other place in a rented property.

GAV for a self-occupied property is considered ‘nil’ for up to two self-occupied properties. In cases an individual owns more than two self-occupied properties (occupied either by himself or by his family), only two of the properties would be considered as self-occupied with the GAV being ‘nil’.

Tax laws provide that rest of the self-occupied properties will be considered ‘deemed to be let out’. The taxability for a ‘deemed to be let out’ property would be similar to a property that has been actually let-out on rent.

Determination of NAV

Any municipal taxes actually paid by the owner of the house property during the year is allowed as a deduction from GAV to arrive at the NAV of the property.

The municipal taxes paid may even comprise arrears for earlier years. However, any tax that is due but not actually paid during year would not be eligible for deduction. Deduction for municipal taxes is not available with respect to self-occupied property where the GAV is considered as nil.

Eligible deductions from NAV

The Act allows only two types of deductions from NAV to arrive at the income from house property liable to tax.

a) Standard deduction: A flat deduction of 30% of NAV is available as standard deduction towards repairs and maintenance of the house, irrespective of the actual amount incurred on any repairs or maintenance. Evidently, standard deduction is not available where GAV is nil, i.e. in case of a self-occupied property.

b) Deduction for interest paid on housing loan: Interest paid on any amount borrowed to construct, re-construct, repair, renew or acquire the house property is eligible for deduction while computing taxable income. The deduction for interest paid is available for loan taken for any type of property i.e. let out on rent, self-occupied or deemed to be let out. Further, the loan may be availed from a bank, financial institution or even friends and relatives. The deduction for interest is subject to certain limits/conditions as discussed below:

Interest deduction for a self-occupied property

The owner would be eligible to claim a deduction of up to `2 lakh towards interest payable during the year on a loan taken for purchase or construction of the house property. This limit applies to loans taken on or after 1 April 1999 and where the acquisition/construction of property is completed within five years. In case the acquisition/construction of the property is not completed within 5 years, the deduction is limited to `30,000.

Interest deduction for let-out/deemed to be let-out property

The owner would be eligible to claim a deduction for the actual interest payable during the year in case of a property that has been let-out or is considered as deemed to be let out. There is no upper limit for such interest deduction.

In case loss arises on claiming aforesaid interest deduction during the year (for both self-occupied and let-out/deemed to be let out), such loss can be set off during that year against other heads of income (such as salary, capital gains, professional income, or income from other sources) up to `2 lakh. Any loss over this amount is allowed to be carried forward for up to eight assessment years. However, it is important to note that carried forward loss from house property can only be set off against income from house property.

Interest on loan for period prior to acquisition/construction of property

Apart from the above, any interest expense incurred during the period prior to the year of acquisition/construction of any property shall be allowed as deduction in five equal instalments starting from the year of acquisition/completion of construction. It is important to note that the aggregate interest deduction that can be availed during a financial year for a property, including the prior period interest, would be as per the overall limits discussed above for self-occupied, let-out or deemed to be let-out property.

Additional interest deduction for first time home buyers

With effect from fiscal 2020, an additional deduction for interest up to `1.5 lakh is provided to first time home buyers subject to the following conditions:

• The loan should be sanctioned by a financial institution during financial year 2019-20

• The stamp duty value of the property should not exceed `45 lakh

• The taxpayer should not own any residential house property on the date of sanction of loan

In conclusion

The above provisions should be carefully considered while computing any income under the head ‘income from house property’. Also, taxpayers must ensure that the documents related to purchase, construction or repair/renovation of the property, rent agreement, housing loan, certificate for interest payable during the year, etc., are maintained in a proper manner so that any query from the tax authorities at a later date can be addressed with ease.

Akhil Chandana and Pooja Lara contributed to this article.

Vikas Vasal is national leader, tax at Grant Thornton India LLP. You can send your queries to vikas.vasal@in.gt.com

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