INCOME FROM HOUSE PROPERTY (SECTION 24 A)
One of the most popular queries from individuals is about how is the rental income they are receiving from property taxable.
In this section, PersonalFN will set out in simple terms and with easy to understand examples, exactly how any income received from a house property (i.e. rent) is taxed, and under what conditions.
Lets start at the beginning.
- I receive rental income from a house property, is it taxable?
Yes. The rental income received from a property is referred to as the annual value. So the annual value (i.e. rental income) of property is taxable as ‘Income from House Property’ if the following conditions are satisfied:
- You own a property that consists of buildings or lands appurtenant (attached) (like a garage); and
- The property should not be used by you for the purpose of any business or profession, the profits of which are taxable.
- Is rental income received from a vacant plot of land also taxable?
No, for the purpose of the ‘Income from House Property’ section, there are definitions that are applicable, as follows:
“Building” is defined as any building (whether occupied or intended for self-occupation), office building, go-down, storehouse, warehouse, factory, halls, shops, stalls, platforms, cinema halls, auditorium etc. Income arising out of the building or a part of the building is covered under this section.
“Lands” is defined as land adjoining to or forming a part of the building. It would depend on the nature of the land, whether it is appurtenant to the residential building, factory building, hotel building, club house, theatre etc. and will include courtyards, compound, garages, car parking spaces, cattle shed, stable, drying grounds, playgrounds and gymkhana.
Income from buildings and lands appurtenant are taxable under Income from House Property.
So, this will include income from a building (that part of it which is owned by you e.g. the flat that you own), and the income from the land appurtenant. If you own a vacant plot and are receiving income from it, it is not included under ‘Income from House Property’, it is included under ‘Income from Other Sources’. - I have let out a property and am receiving rent.
How do I calculate how much of this rent is taxable?
It is very easy. You need to follow 3 very small steps.
First: Determine your property’s gross annual value (see Qs. 4)
Second: Deduct municipal taxes paid
Third: Make deductions available under Section 24b i.e. interest on borrowed capital i.e. a home loan, if any.
The net figure is your taxable income from house property. - How do I calculate the ‘annual value’ of my property?
Take the following steps:
- Find out reasonable expected rent of the property (municipal rent or fair rent, whichever is higher)
- Consider rent actually received / receivable (see Qs 5.)
- Take whichever is higher from a. and b.
- Calculate loss due to vacancy
Step c. minus step d. is the gross annual value of your property.
Deduct municipal taxes to arrive at the net annual value of your property.
- How do I calculate rent actually received / receivable?
It is simply:
Rent of the past year for which the property was available for letting out
Less: unrealized rent (e.g. from a defaulting tenant)
Equals: Rent actually received / receivable
Illustration 1:
HOW TO CALCULATE GROSS ANNUAL VALUE
Mr. X owns a property at Mumbai. Municipal Value is1,80,000. Fair rent is2,15,000. He has given it on rent in the past financial year for 10 months. Actual rent received is30,000 per month. The house is vacant for 2 months in the past financial year.
Municipal Value Rs. 180,000 Fair Rent Rs. 215,000 Annual Rent (for 10 months) Rs. 300,000 Gross Annual Value is calculated as below: Step 1: Reasonable expected rent (MV or FR - whichever is higher) Rs. 215,000 Step 2: Annual Rent (for 12 months =30,000 x 12) Rs. 360,000 Step 3: Higher of Step 1 and Step 2 Rs. 360,000 Step 4: Less Loss Due To Vacancy (Rs. 30,000 x 2) Rs. 60,000 Gross Annual Value (Step 3 - Step 4) Rs. 300,000
Illustration 2:
HOW TO CALCULATE NET ANNUAL VALUE
The same Mr. X’s municipal taxes are10,000 annually.
Gross Annual Value 300,000 Municipal Taxes Rs. 10,000 Net Annual Value (GAV less municipal taxes) Rs. 290,000
Illustration 3:
HOW TO CALCULATE NET TAXABLE INCOME FROM HOUSE PROPERTY
Also, Mr. X has taken a home loan to buy this property. The loan amount is15 lakhs. The interest component paid in the last financial year is1,50,000. Now we calculate how much is Mr. X’s taxable rental income he has received from his property.
Net Annual Value (GAV less municipal taxes) Rs. 291,000 Less Deductions under Section 24 Standard Deduction (30% of Net Annual Value) Rs. 87,300.0 Interest on Borrowed Capital Rs. 150,000 Taxable Rental Income from Property Rs. 53,700.0 - What is the difference between classifying my property as Let Out, Self Occupied or Deemed to be Let Out?
For the purpose of taxability of Income from House Property, House property is classified as:
- Let Out – House Property actually given out on rent
- Self Occupied – House Property self occupied by owner – you actually live in this house
- Deemed to be Let Out – In case of owning more than one house property, one property is treated as Self Occupied, and the other is automatically classified as Deemed to be Let Out property.
- I receive rent from a house on which I have a home loan – this is the only house I own. I am living in a rented apartment. How do I calculate my tax on house property income?
Your income from house property is simply the rental income you receive from the house on which you have the home loan as calculated above. This house has been given on rent and is thus classified as Let Out Property.
Treatment of income from Let Out Property, Deemed to be Let Out Property and Self Occupied Property are summarized below for easy reference:
Particulars Let Out Self Occupied Deemed to be Let Out Annual Rent received (Gross Annual Value) a xxxx NIL xxxx (*) Less: Municipal tax paid, if any b xx NIL Xx Net Annual Value C = a - b xxx NIL Xxx Less: Standard Deduction @ 30% (2) D = 30% of C Xx NIL Xx Interest on Home Loan (3) e Actual 1,50,000 Actual Income chargeable to tax F = c - d - e - What are the deductions available to save tax on this income?
There are 2 deductions available:
- Standard Deduction
- Deduction of interest on a home loan
- What is Standard Deduction?
Standard Deduction of 30% is given to compensate annual repair and maintenance expenses incurred on House Property.
For example: Suppose you have rented out a property and the net annual value was12 lakhs in the previous Financial Year. You can deduct 30% i.e.3.60 lakhs for the purpose of repair and maintenance, regardless of the actual amount spent by you on repair and maintenance. Your taxable income would thus be8.40 lakhs in the previous financial year. - How can I use home loan interest to save tax?
In case of Let out and Deemed to be Let Out properties, you can deduct the actual interest paid by you on a loan taken for the purpose of buying, repairing, constructing, renewing or reconstructing the house property in question, to save your tax.
For a Self Occupied House Property, deduction on account of interest on Home Loan (loan taken only for acquisition or construction of the property) is restricted to1,50,000. - Are there some properties where income received is not taxable?
Yes, the list of these types of properties is:
- Income from any farmhouse forming part of agricultural income;
- Annual value of any one palace in the occupation of an ex-ruler;
- Property Income of a local authority;
- Property income of any registered trade union;
- Property income of a member of a Scheduled Tribe;
- Property income of a statutory corporation or an institution or association financed by the Government for promoting the interests of the members either of the Scheduled Castes or Scheduled tribes or both;
- Property income of a corporation, established by the Central Govt. or any State Govt. for promoting the interests of members of a minority group;
- Property income of a cooperative society, formed for promoting the interests of the members either of the Scheduled Castes or Scheduled tribes or both;
- Property Income, derived from the letting of go-downs or warehouses for storage, processing or facilitating the marketing of commodities by an authority constituted under any law for the marketing of commodities;
- Property income of an institution for the development of Khadi and village Industries;'
- Property Income of any political party.
- Income from house property held for any charitable purposes;
TAX PLANNING TIPS
- How can I save tax if there is Joint Ownership on the property?
In case of joint ownership, the income from house property can be split between both the co-owners which can reduce the overall tax outgo. - I am buying a second house. How can I save tax on it?
If you buy your first house in a single name, the other house can be purchased in the name of your spouse – thus, both of you would have just one house, and won’t have to pay income tax on an income that you don’t even earn. In other words, you will avoid paying taxes on a Deemed to be Let Out property. - How can I save tax by taking a Joint Home Loan?
If you are Joint Owner and also apply for joint home loan, you are eligible for higher deduction on account of interest on home loan as compared to single home loan. In case of joint home loan, both the co-borrowers can take maximum deduction of1,50,000 each. - Are there other tax planning tips on income from house property?
Yes- If you have more than one property, then only one house of your choice is treated as self occupied and all others are considered Deemed to be Let Out (if not Let Out). You should carefully choose which house to be treated as self occupied, in order to minimize your tax liability
- Interest payable on a home loan is only deductible if tax is deducted at source, so take care to ensure that your TDS is paid
CAclubindia
