Income From House Property: Taxability, Exemptions & Deductions Guide

Income from house property is taxable under the Income Tax Act. Know how rental income is taxed, deductions available, and ways to reduce your tax liability.

Under India's Income Tax Act, income from residential real estate has specific tax implications and is a significant source of funding. Chartered accountants, or CAs, are essential in helping people and companies navigate the tax system, particularly about revenue from real estate. This blog will discuss how home property income is categorized, computed, and taxed as well as how taking a certified public accountant education can give professionals the know-how to handle such intricate financial issues.

What is the income from house property?

House property income" refers to the income received in consideration of owning and letting out property, whether residential or commercial buildings and lands appurtenant thereto. Residential property income is treated as such under this head, whereas business property income is treated as business income.

The Income Tax Act classifies house properties in various forms for taxation. The major categories of house properties are given below:

  • Self-Occupied Property: It is a house property utilized for one's own residential needs. If someone owns just a single self-occupied property, the same will be considered a self-occupied property for taxation. In these instances, notional rental income isn't subject to taxation, and people are entitled to deduct allowances on home loan interest incurred up to some limit.

  • Let-Out Property: A let-out property refers to a property that is given on rent or lease to someone else. Income from such property received in terms of rent is chargeable in the head "Income from House Property." Personal expenses on municipal taxes, common deductions (30% of annual net value), and interest paid on home loans can be deducted.

  • Deemed to be Let-Out Property: This category covers properties that are not really rented out but are considered to be let out by the tax department. It generally covers properties that are not used by the owner for reasons of work, business, or otherwise. The notional rental income is treated as taxable in this situation, and municipal tax and interest on house loans can be deducted.

  • Under Construction Property: Properties that are under construction or not occupied are also taken into account for taxation purposes. In these situations, people cannot claim rental income since the property is not given on rent. But as soon as the construction work is over, the respective treatment (self-occupied or let-out) will be decided upon the actual usage or the rental agreement.

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What qualifies as income from house property?

Income from house Property is applicable for such property as a building, house, flat, or any land with buildings on it, e.g., a parking lot. Nevertheless, the property must not be utilized for professional or business purposes to be qualified under this income head. When the property is utilized for business purposes, the income received is regarded as business income, and not house property income. There are two major forms of house property:

  • Self-Occupied Property: This refers to the property in which the owner himself lives. Generally, a homeowner can claim only one house as self-occupied. For these properties, there is no rental income, but a normal deduction is permissible.

  • Let-Out Property: A property let out by the owner to receive rental income. The actual rent received from such property is the basis of the calculation of income under this head.

Calculation of Income of House Property 

The income from house property is determined based on the property's gross annual value (GAV). The GAV is the maximum rent the property may receive in the open market. Note that GAV is calculated irrespective of the fact that the property is rented or self-occupied. The procedures to arrive at the income are as follows:

  • Calculate the Gross Annual Value (GAV): In the case of a let-out property, the GAV is the rent received. In the case of self-occupied property, GAV is nil. 

  • Deduct Municipal Taxes: Property taxes paid to the local municipal body can be deducted from the GAV. Only paid taxes are deductible, so if taxes are outstanding, they cannot be deducted. 

  • Compute the Net Annual Value (NAV): NAV is obtained by deducting municipal taxes from GAV. Formula: NAV = GAV - Municipal Taxes 

  • Claim Standard Deduction: The Income Tax Act provides a standard deduction of 30% of the NAV for repairs and maintenance, irrespective of actual expenditure. 

  • Deduct Interest on Home Loan: If a homeowner has availed of a home loan, the interest on the loan can be deducted from the house property income. For let-out properties, no limit is there on interest deduction, whereas for self-occupied properties, the limit is ₹2 lakh per annum. 

  • Compute the Taxable Income: The amount left after deducting the above-stated amounts is treated as the taxable income in the head Income from House Property.

Dedication Under Income From House Property

The Income Tax Act gives certain deductions that lower the taxable income under this head: 

Standard Deduction (30%): This 30% deduction on NAV is given to pay for property maintenance, regardless of actual maintenance or repair expenses. This deduction will not be adjustable higher or lower according to actual expenses.

Interest on Loan Deduction: 

  • For self-owned houses, there is a one-time deduction for interest on house loans of ₹2 lakh allowed under Section 24(b). 
  • For let-out property, there is no cap on interest deduction, and the taxpayers are entitled to deduct the full interest expense incurred on loans to purchase or build the property.

Pre-Construction Interest: In case a loan has been availed for property construction or purchase, interest incurred on construction can be claimed in five equal amounts beginning from the year of completion of construction. It is applicable both for self-occupied and let-out properties.

Taxation of Unrealized Rent and Arrears 

Two other elements of house property income are unrealized rent and arrears:

Unrealized Rent: Unrealized rent paid by a tenant but not received by the landlord can be claimed as a deduction if certain conditions are fulfilled, like actually trying to recover the rent. 

Arrears of Rent: If rent is received in arrears, it should be accounted for in the year of receipt and will be taxed as income from house property, even if it was not an earlier part of GAV.

Special Consideration of Jointly Owned Properties 

If a property is jointly owned, rental income and tax savings are split among joint owners proportionate to their interest in the property. Both co-owners can claim the maximum 30% standard deduction and, if applicable, individual home mortgage interest deductions, lowering taxable income even more.

Tax Implication of Deemed Ownership 

Deemed ownership is a rule where even if the property is not owned by an individual, it can still be treated as such for tax purposes. Situations, where deemed ownership, comes into play include property given to a spouse or minor child in exchange for insufficient consideration, property inherited, or situations where the individual has a power of attorney over the property.

Filling of Income from House Property in ITR

Income from house property is disclosed in the Income Tax Return (ITR) in the "Income from House Property" category. The tax implications differ based on whether the property is self-occupied or rented out, and all permissible deductions must be properly disclosed to minimize tax liability. 

Knowledge of income from house property, the calculation involved, and the available deductions enable taxpayers to correctly report rent received and benefit from tax savings. Through the effective management of their house property income, landlords and homeowners can maximize deductions, minimize their tax liabilities, and meet the requirements of the Income Tax Act.

FAQs

What is the income from house property?

Income from house property refers to the money that a person makes, primarily from rent, by owning a piece of real estate, which could be a house, apartment, business, or piece of land. The Income Tax statute of 1961's Sections 22–27 primarily governs this statute.

What is income from house property section 22 to 27?

In plain language, Income from house property is the income earned from owning and renting out any property. It includes the rent earned on your property after deducting some expenses and allowances.

What is the rule 4 in income from house property?

Rule 4 in Income from House Property refers to the determination of Annual Value for tax purposes. It states that the higher of the municipal value, fair rent, or standard rent (if applicable) is considered, subject to the actual rent received, to calculate taxable income from the property.

What are the types of house property?

4 types of house properties under the Income Tax Act: Self-Occupied, Let-Out, Deemed to be Let-Out, Under Construction house property. For calculation purposes, all GAV (Gross Annual Value), NAV (Net Annual Value), and fixed deductions.

What is house income?

Household income usually implies the aggregate gross income of all members of a household that are over a given age. Household income encompasses all members of a family who reside under the same roof, including spouses and dependents.

What is exempted from house property income?

Income from the house property of a political party is exempt from tax under Section 13A. Income arising from a property of an approved scientific research association is exempt from tax under Section 10(21). Property income of educational institutions, and medical facilities are exempt from tax under Section 10(23C).

How much does TDS cut in salary?

TDS, or Tax Deducted at Source, is deducted from an employee's salary if it exceeds the taxable limit. The TDS rate varies from 10% to 30% depending on the income slab and tax bracket of the individual.

What are the limitations of income from house property?

There is no restriction for set-off of house property loss against house property income. But there is a restriction of Rs. 2 lakhs for the set-off of house property loss against income from other heads.

What is the 24 B deduction?

Income Tax Section 24(b) gives you the choice to deduct home loan interest as interest paid. As much as a tax deduction of Rs. 2 lahks in gross income a year on one self-occupied house, which is valid under the conditions of completing house building/acquiring or completing purchase/sale process, within a term of five years.

What is standard rent?

Under the laws of property and rent control, "standard rent" means the maximum amount of rent the landlord can recover for a property, as prescribed under the Rent Control Act.