How to calculate tax on house property income
Income from house property is one among the taxable heads of income as per the Income Tax act. It constitutes the income earned from a property by his/her owner.
Property hereby refers to any building (house, office building, godown, factory, hall, shop, auditorium, etc.) and/or any land attached to the building (e.g. Compound, garage, garden, car parking space, playground, gymkhana, etc.).
This is the only head of income, which taxes notional income (except under some circumstances under capital gains, income from other sources). The taxability may not necessarily be of actual rent or income received but the potential income, which the property is capable of yielding.
While self-occupied and rental property are within the purview under this head, income from vacant house is dealt with under the head ‘income from other sources’.
The annual value of property consisting of any building or land appurtenant (belonging) thereto, except such property which is used by assessee for the purpose of business and profession, shall be the taxable value.
How to determine Annual Value?
Gross Annual Value (GAV) of property will be required to determine the annual value, which is higher of:
(a) The sum for which the property might reasonably be expected to let from year to year. In cases of properties where Standard Rent has been fixed, such sum cannot exceed this value. However, where property was vacant during the whole or part of the previous year and rent actually received or receivable is less than expected rent, then rent actually received or receivable is taken as GAV.
(b) Where property is actually let out and the rent received or receivable is more than the amount determined in (a) above, the annual value would be the actual rent received.
Following amounts will be excluded while determining GAV:
- The amount of municipal tax realized from a tenant.
- Notional interest on the amount received towards ‘rent/security deposit’ from the tenant
- Repairs carried out by the tenant.
When Annual Value is ‘NIL’?
The annual value of a property shall be considered ‘nil’ in following cases:-
(a) Self-occupied property, i.e. property which is in occupation of the owner for the purpose of his own residence and he does not derive any other benefit out of it.
(b) Similarly, if the owner of only one residential house is unable to occupy it on account of his employment, business or profession carried on in any other place and he is residing in a property not owned by him.
Let’s illustrate this with an example. Mr. Piyush Arora, who bought a house in Mumbai had to shift to a rental accommodation in Banglore due to his job. In this scenario, the annual value will be nil and still Mr. Piyush will get a tax deduction up to Rs. 1,50,000 for interest paid on borrowed capital.
Net Annual Value is arrived at after deducting the municipal taxes and the unrealized rent (subject to certain conditions). However, receipt of any unrealized rent shall be chargeable to tax in the year of receipt.
Deductions u/s 24
|Serial No||Particulars||Amount or Percentage Deduction|
|1||Standard deduction||30% of Net Annual Value|
|2||Property acquired/constructed after 1st April, 1999 with borrowed capital (deduction is allowed only where such acquisition or construction is completed within 3 years from the end of the financial year in which capital was borrowed)||Rs. 1,50,000|
|3||In all other cases except in point 2.||Rs. 30,000|
|4||In case of let out property||Full deduction of interest on borrowed capital.|
*Interest for the period prior to the acquisition or construction of the premises would be deductible in five equal instalments starting from the year in which property is acquired/constructed (possession).
Tax Planning for Income from House property
You can minimize your tax out go in the following cases:-
(1) Owing more than one property – If you own more than one property, then only one house of your choice will be considered as self-occupied and others will be considered as let out or Deemed to be let out (if not let out). Therefore, you should carefully evaluate and choose a property with less tax liability.
If Shiva has two houses than he can choose one which will minimize his tax liability.
|Particulars (If Deemed Let out)||House 1||House 2|
|Less: (Municipal Taxes)||(40,000)||(54,000)|
|Net Annual Value (NAV)||3,20,000||6,46,000|
|Deductions u/s 24|
30% of NAV
Interest on borrowed capital
|Income from House Property||49000||2,02,200|
If Shiva considers House 1 as Self-occupied and House 2 as deemed to be let-out then his income from house property will be Rs. 52,200 and it will be negative Rs. (1,01,00) vice-versa. Therefore, he should consider House 1 as deemed let out and House 2 as self –occupied.
(2) Joint Home Loan – If you are a Joint owner and also apply for a joint home loan then both the co-borrowers can take a maximum deduction of 150000 each.
(3) First house is in a single name and planning a second home – If your first home is in single name then you can buy a second home in your spouse’s name to help you avoid tax on ‘deemed to be let-out’ property.
(4) Joint Ownership – Income from house property can be divided between both the co-owners which can reduce overall tax liability.
Your home and a meticulous planning can lighten up your tax burden to a great extent.