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Taxability of House Property Income

Taxability of House Property Income 2

Owning a house property in this fast moving world is considered as a safe investment but it comes with certain responsibilities as well, such as timely payment of municipal taxes and paying the relevant income taxes  as well. We would be discussing them in detail below.

Definition of House Property as per Income Tax Act’1961
House property as defined under Income Tax Act’1961 consists of:

  • Any Building or land appurtenant thereto whether commercial or residential
  • Owned by the taxpayer
  • Not being a property used for the purpose of Assesse’s own business or profession

Computation of House Property Income under the Act

Particulars Self -Occupied Property Let Out Property
Gross Annual value(GAV) (1) Nil Higher of Expected Rent and

Gross Rent received/receivable

(Less): Municipal Taxes (2) [Restricted to GAV amount] Nil (Not allowed in case of Self -Occupied property) Allowed on the payment basis by the owner himself. No deductions allowed for the payment by tenant.
Net Annual Value(NAV)  [(1-2)=(3)] Nil Deduct municipal taxes from GAV
(Less): Standard deduction u/s 24(a) equal to 30% of NAV (4) Nil Deduction for whitewashing, repairs, etc. are being given as a standard deduction under this section
(Less): Deduction u/s 24(b) for Interest on borrowed capital (5) Limit discussed below* No such limit
House Property Income/(Loss)[(3-4-5)=6] Amount as per calculations Amount as per calculations

Deduction u/s 24b for Interest on Borrowed Capital for Self-Occupied Property
Most of us take a home loan nowadays for the purchase/construction of the house property and to give benefit to the Assessee Income tax act’1961 provides for the deduction of the interest paid on the home loan. The Principal repaid is allowed as a deduction u/s 80C. The Act provides for both the pre and post construction/purchase interest to be allowed as deduction but in a different manner discussed below:

Post Construction Interest: The Interest on home loan paid after the completion of the property is allowed to be deducted u/s 24b restricted to a limit of Rs 30,000 to be started from the end of the financial year in which the house property is constructed or purchased. An Assessee can claim the deduction Upto Rs 200,000 if the following conditions are satisfied:

  • The loan is taken after 1st April, 1999.
  • The loan is taken for the purchase/construction of the house property not for repairs, renewal or reconstruction.
  • The house should have been completed within 5 years of taking the loan.

Further, if the assessee is not able to fully claim his interest due to the limit restrictions he can claim such remaining interest restricted to additional Rs. 50,000 u/s 80EE only if he satisfies all the following conditions:

  • Loan has been sanctioned by financial institution during the financial year 2016-17;
  • The amount of loan sanctioned does not exceed Rs. 3,500,000;
  • The value of residential property does not exceed Rs. 5,000,000;
  • The Assessee does not own any residential house property on the date of sanction of loan; and
  • Where deduction has been allowed under this section, no deduction shall be allowed in respect of such interest under any other provision.

With an objective to provide an objective to the ‘Housing for all’ initiative of the Government Finance (No. 2) Act, 2019 has inserted a new Section 80EEA under the Income-tax Act for those individuals who are not eligible to claim deduction under Section 80EE. An individual can claim deduction up to Rs. 150,000 under section 80EEA subject to following conditions:

  • Loan should be sanctioned by the financial institution during the period beginning on 01-04-2019 and ending on the 31-03-2020;
  • Stamp duty value of residential house property should not exceed Rs. 4,500,000;
  • The Assessee should not own any residential house property on the date of sanction of loan; and
  • The Assessee should not be eligible to claim deduction under Section 80EE.

Hence, an individual who does not meet the criteria of Section 80EE shall now be eligible to claim deduction under section 80EEA. 

Pre- Construction Interest: The interest paid before the completion of house property is also deductible under section 24b in 5 equal annual installments beginning with the year in which the property was acquired/ constructed. For e.g. if the pre-construction paid is Rs. 50,000 so the amount that will be allowed in the current year is Rs. 10,000[50,000/5]. 

Concept of Deemed Let-out in case of multiple house property
Until FY 2018-19, if an Assessee owns more than one house property as a self- occupied property then he was required to pay the tax on one of his self-occupied property as a let out property calculated on the notional rent as reduced by the applicable deductions. This concept is known as “Deemed to be let out Concept”.

From FY 2019-20, the relaxation of the number of house property as a self- occupied property has been increased to 2 which means the Assessee can now hold Upto 2 Self- occupied  properties and does not pay the tax as per deemed to be let out concept.

Suppose if an Assessee is holding more than 2 house property as self-occupied property then he has to deem one of his property as the Let out as per the benefits he is gaining by choosing the nature of House property. 

Set off and Carry Forward of House Property Loss
The Loss incurred under the head “House Property” is allowed to be set off against the other head incomes restricted to a limit of Rs. 200,000 and any balance remaining is allowed to be carry forward for a period of 8 assessment years and this brought forward loss can be setoff only against “Income from House Property” only in the subsequent years. 

For Example: Mr. A has incurred a loss of Rs 300,000 from House property during the year and earned a salary income of Rs 250,000. He is allowed to set off house property loss up to Rs 200,000 with the salary income and can carry forward loss of Rs. 100,000 [3L-2L] for the 8 assessment years. The brought forward loss in the subsequent years will be allowed to be set off only against House Property Income.

Treatment of Arrears and Unrealized Rent
Arrears of rent mean the rent, which is to be paid by the tenant on account of increase in the rentals from the retrospective date. If an owner receives arrears of rent from his tenant, he is required to pay the tax on such receipt reduced by a standard deduction of 30% means he is required to offer his income from arrears of rent at 70% only.

Unrealized rent is the rent, which is not recovered by the owner from the tenant. The income tax act gives the option to reduce such period rent from Annual Value if the following conditions are satisfied:

  • The tenancy is bona fide.
  • The defaulting tenant has vacated the property, or steps have been taken to compel him to vacate the property.
  • The defaulting tenant is not in occupation of any other property of the Assessee.
  • The Assessee has taken all steps to recover such amount, including legal proceedings or he satisfies the Assessing Officer that legal proceedings would be useless.

Note: The Subsequent realization of Unrealized rent will be taxed in the hands of the Assessee and a 30% standard deduction will be allowed to be reduced from the receipt irrespective of the fact where the Assessee is the owner or not in the year of receipt. 

Taxability of House Property income in the New Tax regime from AY 2021-22
As we all know the Finance Act’2020 has introduced some major changes in the tax slabs if an Assessee opts for the new regime as per Section 115BAC. He is required to forego major of the exemptions and deductions to avail the benefits of new regime.

In case of an Assessee owning a Self-occupied property or a vacant property, he will not be able to claim deduction u/s 24b for the interest on housing loan and hence his income from housing property will always be Nil. In case of let out property the Assessee can claim deduction u/s 24b but cannot set off or carry forward any loss arising due to such deduction under the head “House Property”.

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