Other than owning a beautiful home for yourself and your family, people also take home loan to get some benefits on the income tax. As per Income tax Act 1961, any building and/or land attached to the building is considered as house property. Government imposes tax on house property as income from house property may not implicitly mean the rent or income received or generated by the property but it emphasizes on the fact that the potential income that the house property is capable of generating. So, it can be said that the tax is imposed on the potential income that the property may yield in future. Here, the important point to be noted is that rental properties and self occupied house property also fall in the purview of sources of income from house property.
What is the basis of calculating tax on Income from house property?
The calculation of tax is based on the “Annual Value” of the property. Annual Value of the property is the capacity of the property to generate income. This tax is to be borne by the owner.
Before understanding how the computation of the income from house property is done, let us understand the basic and important terminologies related to it.
- Annual Value: Income from house property is based on its annual value. It is assumed that even if the property is not let out on rent, a notional rent would be received, which is taxable as its annual value. Annual value of the house property is nothing but the capacity of the property to earn reasonable income if it is let out from year to year.
- Municipal Value: As the name suggests, it is the value of the property that the Municipal Agencies derive.
- Fair Rent Value: This value is derived by assuming the rent received by other similar property in the same area.
- Standard Rent: Rent prescribed by rent control act. It is decided by keeping in mind the interest of both owner and tenant.
- Actual Rent Received: As the name suggests, it is the actual rent amount that the owner/s receives from the tenant.
Gross Annual Value (GAV): Gross Annual Value is the highest value derived by comparing the following 3 items:
- Fair Market Value
- Municipal Value
- Rent Received
Kindly note that wherever Rent Control Act is applicable then the Gross Annual Value will be highest value derived from the below 2 items namely:
- Standard Rent
- Rent Received
Now let us see how the computation of Annual Value is done. As we know Annual Value is the capacity of the property to earn income so annual value is derived from the following steps:
Step 1: Determine the gross Annual Value of the property. GAV is highest value derived from Fair Market Value, Municipal Value and Actual Rent Received.
Step 2: After determining the GAV of the House property, deduct Municipal Taxes paid (if any) by the owner during the previous year. In this, we derive the Net Annual Value (NAV) of the house property.
Step 3: Finally the formula to derive annual value is:
Annual Value = Net Annual Value – All Deductions
Above is the computation method of Annual Value of the property. Let’s learn more about the deductions that are allowed under section 24 of the income tax act 1961.
Section 24 of the Income Tax Act, 1961
Section 24 of the Income Tax Act is in relation to the income from house property. This section deals with exemptions on the interest paid on home loans. As we know, buying a home is either a need, investment, asset or all three. And every one works upon saving tax by the investment that individuals do in relation to house property.
Section 24 of the Income Tax Act 1961 is called as “Deductions from income from house property”. This section explains what all deductions are allowed from the income that an individual earns through house property. Income from house property can be earned in following cases:
- When a house property is given on rent, then the rent received by the owner is considered as income.
- If an individual owns more than one house then, except the self occupied house, all the remaining properties will be considered for income from house property.
As stated above, the owner refers to the person who is entitled to receive the income incurred from renting of the house while the person who receives financial benefits on behalf of the owner, but is not the actual owner of the property, is called as a deemed owner. Please note that the income on house property is taxed on the income of the person who receives the financial benefit irrespective of the fact that whether the person is registered owner of the property or not.
Deductions under Section 24 of the Income Tax Act 1961
Let us understand the deductions that are allowed under Section 24 of the Income Tax Act 1961 on income from house property. Note that taxable income under the section “income from house property” shall be calculated after making following deductions:
- Standard Deduction: As the name suggests, this is an exemption that is allowed to all taxpayers. Under this deduction, the assessee is allowed a standard deduction of sum equal to 30% of the net annual value. Kindly note that this standard deduction is not applicable on self occupied house.
- Interest on Borrowed Capital: Most of the taxpayers opt for housing loan while purchasing the house. So this deduction is related to the interest component of the borrowed capital i.e. the interest on loans. So, if the taxpayer has taken loan then interest paid by the taxpayer on the principal of the loan is exempted from taxation. Here, the house property includes property that is acquired, constructed, repaired, reconstructed or renewed. So, if funds are borrowed to carry out any of the aforesaid activity then the interest on such borrowed capital is exempted and is allowed as a deduction
Points to be considered:
- The maximum deduction allowed on interest payment of home loan for a self-occupied property is Rs. 2 lacs.
- In a scenario when a property which is not self occupied and is rented or deemed to be rented, there is no maximum limit for tax deduction. The taxpayer can avail deduction of whole interest amount paid under section 24.
- But if the owner, due to his occupation or employment, does not occupy the house and is residing at another place then the tax deduction allowed under section 24 of income tax act is Rs. 2 lacs only.
- Kindly note that the amount of interest payable should be calculated separately every year and should be claimed accordingly. This is because the tax deduction allowed under section 24 of the Income Tax Act, in regard to interest on housing loan, is deductible on accrual basis i.e. the interest incurred on the borrowed capital is regardless of when the actual payment of interest is made. Thus, tax deduction can be claimed irrespective of the fact that whether the actual payment is done during the year or not. This tax deduction is unlike the tax deduction that the taxpayer gets under section 80C where the tax deduction on principal repayment is allowed only on payment basis.
Another important aspect is that the tax benefit of Rs.2 lacs allowed under section 24 of the Income Tax Act is reduced to Rs. 30,000 if the loan taken for construction is not completed in 5 years or if the property is not acquired within 5 years. The 5 years are calculated from the end of financial year in which the loan was borrowed.
- Another aspect that we should note is that of pre-construction interest. Pre-construction interest refers to the interest paid on the loan taken for the construction of the property. So in this scenario, deductions are allowed on loan taken for purchasing or for construction of the property but no deductions are allowed on loan taken for reconstruction or repairs of the property.
- The pre-construction interest deduction can be claimed in 5 equal yearly installments and can be claimed in the beginning of the year in which the construction of the property is finished. In case of a self occupied property, taxpayer can claim Rupees 2 lacs in a year.
- If the loan is taken for reconstruction or renovation of the house property, then the deduction is not allowed to be taken till the renovation or reconstruction of the property is completed. Thus, the deductions allowed can be claimed only after completing the renovation or reconstruction of the property.
- Any amount paid as a part of commission or processing fees or brokerage is not allowed as deduction.
- Section 24 allows only 2 deductions from Net Annual Value namely: Standard deduction and Interest on Borrowed Capital and no other deductions are allowed.
- Tax on house property is calculated on the Net Annual Value of the property. And further, from the Net Annual Value the deductions are done
- If the house considered for computing income from house property is vacant for a certain period of the year and then is let out and the owner or deemed owner is receiving rent then the computation should be done only on the rent received and not computed for the whole year. For example: If the house is let out for 10 months for rent of Rs.10,000 then the gross value of the property will be calculated as 10*10,000=1,00,000. Tax will be thus computed on this amount after doing standard deduction of 30% and deducting any interest on loan.
- If the taxpayer’s house is vacant for the whole year and the taxpayer is residing at different location due to his employment but is still paying Municipal taxes, then this can be offset against income from other sources like salary etc. in the same year. If the taxpayer is unable to offset it then it can be carried forward this up to 8 years.
Thus above is the overall explanation of deductions allowed under section 24 of the Income Tax Act 1961.
Following is the tabular representation of important points of section 24 of Income Tax Act.
|Tax deduction allowed||
Two main deductions allowed namely:
|Tax Deduction based on||Accrual Basis|
|Tax deductions limits:||
|Borrowed Capital can be used for:||Purchase of Property, Construction, Reconstruction, Repair or renewal of Property.|
|Tax Deduction can be claimed up till:||
|Restriction on Sale of Property||NIL|