Introduction:
Almost every individual dreams of having a house of his own. Many a times, an individual invests his entire life savings in buying a property on his name. This is sometimes done through utilising one’s long saved own funds or the same is done through finances raised form various authorities. Citizens from lower to middle income groups finds it difficult to gather such a huge corpus and applying it same in one go towards buying a house of his own, so they opt in to get this dream fulfilled through housing loans or finances from others. Buying such a property from borrowed funds also yield them multiple tax benefits. These tax benefits are mentioned in Section 24 of Income Tax Act, 1961.
What is the meaning of Income from House Property?
Out of different heads of Income as mentioned in Income Tax Act, income from house property gives certain special tax benefits to individuals who buy these properties on loans. There are three kinds of house properties mentioned in Income Tax Act which are i) Self Occupied ii) Let out iii) Deemed to be let out.
What are the ways through which one can earn income from owning a house property?
> Rental Income on a property which is let out or given on rent basis
> Annual Value of property which is “deemed” to be let out (this is a situation where assessee owns more than two house properties)
> Annual Value of a property which is self occupied (This is always Nil)
The annual Value of a self-occupied property is always Nil i.e. Zero or it can even be negative if interest on home loan amount is paid.
If the property is let out (i.e it is given on rent), its rent received from the tenant is your Gross Annual Value.
For a deemed to be let out property, an amount of rent of a similar place or prevailing in the area under consideration is the Gross Annual Value of the property.
Deductions Under House Property:
While computing income from house property, the amount of income is calculated after considering the following deductions, namely:
- Municipal Taxes :
Municipal taxes is the amount paid to the municipal corporation authority of that area annually. Municipal taxes are to be deducted from the Gross Annual value to derive the Net annual value of the house property. Deduction of municipal tax is allowed only the same has been borne i.e. paid by the owner and paid during that financial year itself.
- Standard Deduction
a sum equal to thirty per cent of the annual value.
This amount of 30% is calculated on the Net Annual Value i.e. a value derived after reducing the municipal taxes paid. This standard deduction is given irrespective of the actual expenditure incurred by the assessee on any kinds of expenses like repairs, insurance, interiors, electricity, water, major structural changes etc.
No standard deduction is given on a Self-Occupied property.
- Deduction of Interest on Housing Loan for the property
Any person who has availed the loan for purchasing a house property can claim a deduction of upto Rs. 2,00,000/- on their interest paid on such home loan. This is also applicable if the property is vacant.
In case of let-out house properties, entire interest amount paid is allowed as deduction. However, this amount of interest is restricted to Rs.2,00,000 every year and if the amount of interest exceeds Rs.2,00,000/- then the balance amount of interest deduction can be carried forward to next year for claiming as deduction. The remaining loss i.e. Interest amount remaining after claiming as deduction from income can be carried forward to future years – 8 years in total. This deduction is allowed only in case of Income from house property and thus loss arising out of such interest payment can be set off only against income from house property.
Deduction on interest is limited to Rs.30,000 if:
>The home loan is taken for any purpose other than for the purchase and construction of a property;
>The loan must be taken before 1 April 1999;
> The purchase or construction is not completed within 5 years from the end of the financial year in which the loan was taken.
Principle portion of Housing Loan:
Principle part of the housing loan repayment can be claimed as a deduction under Section 80C which is restricted to Rs.1,50,000 in aggregate of all home loan repayments.
Amendment as per Budget in 2019:
An individual having two house properties can consider both of them as Self occupied house properties if none of them are let out. However, any third house property other than two self occupied properties will be considered as “Deemed to be let out” house property if not let – out in actual. Prior to 2019, only one house property was allowed to be treated as a Self Occupied House Property.
Treatment as per New Tax Regime from FY 2020-21:
If a person decides to opt for new Tax Regime, then the deduction for interest on home loan as well as 80C deduction for repayment of the principal amount of loan will not be allowed to be claimed as deduction . No set off of House Property loss will be allowed against any other head of Income.
Conclusion:
While computing house property income, the most important factors include interest payment on housing loans, municipal taxes, rental receipts and nature of properties i.e. Self Occupied or Let out.
These deductions from house property income are allowed only if an individual files his return of income as per old tax regime. No such deductions are available if he decides to file his return of income in new tax regime.
Maximum amount of Loss from house property is restricted to Rs.2,00,000 for every financial year and balance loss can be carried forwards to 8 future financial years.
While computing his return of Income one needs to consider all these aspects and then decided whether it is beneficial for him to opt old tax regime or new tax regime.
Many people opt to buy house properties on loan just to make savings in Income tax, whereas after introduction of new tax regime this will have a significant impact on their tax planning decisions.