Treatment of income from house property in hands of salaried personals

As you are aware that, the period of Jan-March is a period in which we salaried personal are in tremendous stress to save our taxes and the instruments in which we have to invest to save taxes. This Tax Planning should be done at the beginning of the financial year and you have to prepare a budget considering all your incomes and expenses and also the estimating tax you supposed to pay on all your income. Your employer generally shares with you Tax Forecast for the year and at the beginning your TDS will be less and increased on the basis of Bonus, Increments and of course your promotion in which your payment scale generally increased.

A residence in your name is one of dream of all person and it is now become a status symbol to have a permanent address in your name of metros. A Flat in your name owned with help of your banker or on Housing Loan taken from bank helps you in tax planning and creation of Capital Asset for you. The value of your flat/house will appreciate with the time and this will provide you financial stability in critical time.

If you have a flat/house in your name and you are not residing in the same or you are residing at rented house or in your parents'house, then claim of HRA become difficult.

LET'S CONSIDER PROVISIONS RELATED TO HRA

HRA means house rent allowance in income tax, which is paid by an employer to the employee. It means the salary component received towards the rent payment and is allowed as a deduction from taxable salary under Section 10(13A).

PLEASE NOTE THAT

• This allowance is for expenses related to rented accommodation. If you don't live in a rented accommodation, this allowance is fully taxable.
• Please note that the tax exemption of house rent allowance is not available in case you choose the new tax regime from FY 2020-21 (AY 2021-22).
• You may claim the HRA as it has no bearing on your home loan interest deduction. Both can be claimed.
• If you have taken a house on rent and are making a payment of over Rs 1 lakh annually - remember to provide the landlord's PAN. Else, you may lose out on the HRA exemption.
• Landlords without a PAN must sign a self-declaration stating he does not have a PAN, as per circular No. 8/2013 dated 10 October 2013.
• Tenants paying rent to NRI landlords must remember to deduct TDS of 30% before making the payment towards rent.
• You can claim HRA exemption by submitting proof of rent receipts to your employer. Alternatively, you can claim the HRA exemption yourself while filing your income tax return.
• Please Note that you have to submit your rent receipts for claiming HRA, if required and asked by your employer, you can submit Notarised Rent Agreement with the employer. Your employer dose not have right to instruct you to file registered Rent Agreement etc.
• Your salary slip/Form 16 received from your employer must have bifurcation of salary paid to you, such as Basic, DA, HRA, and other allowances.
• If your salary slip/Form 16 does not have such bifurcation, then there will be problem in claiming HRA. You cannot claim HRA if HRA is not given in your Salary Slip/Form 16 as separate component.
• Income Tax Forms are automated and whatever your employer shared your details with Income Tax, while submitting TDS return will going to populated in your Income Tax Forms at the time of filing. So, check your details before the year end and filing of your return.
• Dearness allowance is a component of salary towards adjustment for living costs paid generally to government employees, public sector employees, and pensioners. Dearness allowance is calculated as a percentage of basic salary to cover the impact of inflation.
• Please note that you can claim HRA if you reside at your parents' house, provided that you transfer the rent to your parents. In this case, your parents will have to report this rental income in their return of income for taxability purposes.
• Please keep transactions with your parents simple and pay rent through banking channel and check that your parent even though not liable to file Income Tax Return, file return.
• Further, the benefit of HRA can also be claimed if you own a house and are claiming a deduction for principal payment u/s 80C and interest deduction u/s 24. The reason for residing in a rented house should be genuine and valid. The IT department can closely monitor this arrangement.
• If you missed submitting rent receipts or a copy of the rental agreement to your employer at the time of proof submission of the declared rent, you can claim the HRA deduction while filing ITR.
• In case you miss claiming the HRA while filing your return, you can file a revised return u/s. 139(5) of the IT Act, 1961 to correct the error before 31st December of the assessment year or completion of assessment, whichever is earlier.

HRA EXEMPTION IS ALLOWED LEAST OF THE BELOW

• Actual HRA received by the employee
• 40% of salary for a non-metro city or 50% of salary if the rented property is in metro cities like Mumbai, New Delhi, Kolkata, and Chennai
• Actual rent paid should be less than 10% of salary.

PLEASE NOTE THAT: For the calculation above, the salary would include basic, dearness allowance, and a fixed percentage of commission.

PLEASE NOTE THAT - IF YOU ARE NOT RECEIVING HRA

In this case also you can claim deduction u/s. 80GG as follows;

• You are self-employed or salaried;
• You have not received HRA at any time during the year for which you are claiming 80GG;
• You or your spouse or your minor child or HUF of which you are a member - do not own any residential accommodation at the place where you currently reside, perform duties of office, or employment or carry on business or profession.
• If you own any residential property other than the place mentioned above, you should not claim the benefit of that property as self-occupied. The other property would be deemed to be let out to claim the 80GG deduction.

AMOUNT OF DEDUCTION AVAILABLE U/S. 80GG

The least of the following will be exempted from tax:

1. Rs 5,000 per month;
2. 25% of adjusted total income*;
3. Actual rent should be less than 10% of adjusted total income*

Adjusted total income is calculated as below: Total income minus

(i) long-term capital gain minus
(ii) short-term capital gain under Section 111A minus
(iii) income under Section 115A or 115D minus
(iv) deductions 80C to 80U (except deduction under Section 80GG).

LET'S CONSIDER SUBJECT MATTER

INCOME FROM HOUSE PROPERTY

Here is how you compute your income from a house property:

a) Determine Gross Annual Value (GAV) of the property: The gross annual value of a self-occupied house is zero. For a let-out property, it is the rent collected for a house on rent.

b) Reduce Property Tax: Property tax, when paid, is allowed as a deduction from GAV of property.

c) Determine Net Annual Value (NAV): Net Annual Value = Gross Annual Value - Property Tax

d) Reduce 30% of NAV towards standard deduction: 30% on NAV is allowed as a deduction from the NAV under Section 24 of the Income Tax Act. No other expenses such as painting and repairs can be claimed as tax relief beyond the 30% cap under this section.

e) Reduce home loan interest: Deduction under Section 24 is also available for interest paid during the year on housing loan availed.

f) Determine Income from house property: The resulting value is your income from house property. This is taxed at the slab rate applicable to you.

g) Loss from house property: When you own a self-occupied house, since its GAV is Nil, claiming the deduction on home loan interest will result in a loss from house property. This loss can be adjusted against income from other heads.

PLEASE NOTE THAT: When a property is let out, its gross annual value is the rental value of the property. The rental value must be higher than or equal to the reasonable rent of the property determined by the municipality.

TAX DEDUCTION ON HOME LOAN INTEREST: SECTION 24

1. Homeowners can claim a deduction of up to Rs 2 lakh on their home loan interest, if the owner or his family resides in the house property.
2. The same treatment applies when the house is vacant.
3. If you have rented out the property, the entire home loan interest is allowed as a deduction.

However, your deduction on interest is limited to Rs. 30,000 instead of Rs 2 lakhs if any of the following conditions are satisfied:

A. Condition I

The loan is taken on or after 1 April 1999, and

The purchase or construction is not completed within 5 years from the end of the FY in which loan was availed.

B. Condition II

The loan is taken before 1 April 1999.

C. Condition III

The loan is taken on or after 1 April 1999 for the purpose of repairs or renewal of the house property.

PLEASE NOTE THAT 

When is the deduction limited to Rs 30,000?

As already mentioned, if the construction of the property is not completed within 5 years, the deduction on home loan interest shall be limited to Rs. 30,000.

The period of 5 years is calculated from the end of the financial year in which loan was taken. So, if the loan was taken on 30th April 2015, the construction of the property should be completed by 31st March 2021. (For years prior to FY 2016-17, the period prescribed was 3 years which got increased to 5 years in Budget 2016). (Only for illustration).

Note: Interest deduction can only be claimed, starting in the financial year in which the construction of the property is completed.

How do I claim a tax deduction on a loan taken before the construction of the property is complete?

Deduction on home loan interest cannot be claimed when the house is under construction. It can be claimed only after the construction is finished. The period from borrowing money until construction of the house is completed is called pre-construction period. Interest paid during this time can be claimed as a tax deduction in five equal instalments starting from the year in which the construction of the property is completed. Understand pre-construction interest better with this example.

CONDITIONS OF CLAIMING DEDUCTION ON HOME LOAN

1. The amount of deduction you can claim depends on the ownership share you have on the property.
2. The home loan must also be in your name. A co-borrower can claim these deductions too.
3. The home loan deduction can only be claimed from the financial year in which the construction is completed.
4. Submit your home loan interest certificate to your employer for him to adjust tax deductions at source accordingly. This document contains information on your ownership share, borrower details and EMI payments split into interest and principal.
5. Otherwise, you may have to calculate the taxes on your own and claim the refund, if any, at the time of tax filing. It's also possible that you may have to deposit the dues on your own if there is a tax payable.
6. If you are self-employed or a freelancer, you don't have to submit these documents anywhere, not even to the IT Department.
7. You will need them to calculate your advance tax liability for every quarter.
8. You must keep them safely to answer queries that may arise from the IT Department and for your own records.

TAX BENEFITS ON HOME LOANS FOR JOINT OWNERS

1. The joint owners, who are also co-borrowers of a self-occupied house property, can claim a deduction on interest on the home loan up to Rs 2 lakh each.
2. And deduction on principal repayments, including a deduction for stamp duty and registration charges under Section 80C within the overall limit of Rs.1.5 lakh for each of the joint owners.
3. These deductions are allowed to be claimed in the same ratio as that of the ownership share in the property.
4. You may have taken the loan jointly, but unless you are an owner in the property - you are not entitled to the tax benefits.
5. There have been situations where the property is owned by a parent and the parent and child together take up a loan which is paid off only by the child. In such a case the child, who is not a co-owner is devoid of the tax benefits on the home loan.
6. Therefore, to claim the tax benefits on the property:
7. You must be a co-owner in the property
8. You must be a co-borrower for the loan
9. Each co-owner can claim a deduction of maximum Rs 1.5 lakh towards repayment of principal under section 80C. This is within the overall limit of Rs 1.5 lakh of Section 80C. Therefore, you can avail a larger tax benefit against the interest paid on home loan when the property is jointly owned and your interest outgo exceeds Rs 2 lakh per year.
10. It's important to note that the tax benefit of both the deduction on home loan interest and principal repayment under section 80C can only be claimed once the construction of the property is complete.

HRA AND DEDUCTION ON HOME LOAN

Scenario 1: You live in a rented accommodation since your house far from your office etc.

Since Mr. X lives in a rented house in Mumbai since his own office, son's school and his wife's office are in Mumbai , He has his own house in Navi Mumbai which is far and also lying vacant.

He is paying interest on the loan on his own house. Mr. X can claim:

1. HRA for rent he pays for the house in Mumbai, and
2. Deduction on interest up to Rs 2,00,000 on the home loan

Scenario 2: You live in a rented house; your own house is also let out as Mr. X bought a house in Navi Mumbai , though he lives and works in Mumbai . and he gives that flat in Navi Mumbai on rent.

In this case Mr. X can claim:

1. HRA for the rent she pays for the house in Bangalore and
2. Claim the entire interest she pays during the year on the home loan

PLEASE NOTE THAT:

• Till FY 2016-17, loss under the head house property could be set off against other heads of income without any limit.
• However, form FY 2017-18, such set off of losses has been restricted to Rs 2 lakhs.
• This amendment would not really affect taxpayers having a self-occupied house property.
• This move will have an impact on taxpayers who have let-out/ rented their properties. Though there is no bar on the amount of home loan interest that can be claimed as a deduction under Section 24 for a rented house property, the losses which could arise on account of such interest payment can be set off only to the extent of Rs 2 lakhs.

EXAMPLE: Suppose Mr. X is a salaried employee at Mumbai and salary received by him from his employer is of Rs. 17,50,000/-p.a. He has purchased a residential house property at Navi Mumbai on 01/04/2022 with the help of HDFC Ltd., housing loan of Rs. 40.00 Lakhs. He has paid Rs. 3,50,000/- as interest on housing loan and Rs. 1,50,000/- as Principal Amount during the FY 2022-23. He is residing with his father and giving rent of Rs. 25,000/- p.m. at Mumbai nearby his office to save cost and time of travelling. He has rented his own House Property to Mr. Y @35000/- p.m. What are tax implications on his income.

STEP 1- Asalready discussed above related to HRA, we are not going to calculate HRA ,but these points should be kept in mind of Mr. X for claiming HRA;

PLEASE NOTE THAT:

• If you are living with your family in a house, then that house is called self-occupied property and hence Annual Value of that property is taken to be zero and not income will be considered.
• If you have two houses and using the same for living or one house is kept vacant, in this case one house property is deemed to be let out and Annual Value will be Value declared by the Municipality.
• If you have constructed a two-floor building and using first floor for residence and ground floor for business purpose. In this case first floor will be considered as self-occupied and Ground Floor will not be taxed under Income from House Property.
• In some cases a let out property remains vacant during the year, then in this case you have to calculate Reasonable Rental Value ( based on various considerations).
• Please note that if you are a tenant and you have sublated some part of the residential property to another person or sublet the same in this case income received will be not taxable under Income From House Property and it will be taxable under Head -Income From Other Sources.
• Please note that interest on loan taken from friends and relatives is also qualify as deduction under Section 24(b) of the Income Tax Act, 1961. But deduction of Principal Paid to friends or relatives does not qualify as deduction u/s. 80C of the IT, Act, 1961.
• Please note that deduction of interest from Annual Value of Property will be allowed only after completion of House/Flat. So, in this case interest paid prior to completion of construction will be claimed in five equal instalments from the date of completion of construction.
• In case you have two houses on loan and paying interest , then note that you can claim interest for both houses subject to maximum Rs. 2,00,000/- and in case of Principal Amount deduction u/s. 80C the limit will be Rs. 1,50,000/- only.
• The Municipal Taxes are allowed as deduction on the basis of payment and you can claim deduction of whatever amount paid in the year of payment even for earlier years also.
• In case of a flat has been given to you wife as a gift i.e., for nil consideration, you will be considered as the “deemed owner” of the house and the income from renting the flat will be clubbed in your hands and you must offer the same to tax as house property income.
• Suppose you have some unrealised rent from earlier years and during FY 2022-23 you have received the same ,now in this case since unrealised rent has been deducted from Rental Income of earlier years , the same will be taxable in the FY you have received the same. Now you can claim Standard Deduction @30% from the unrealised rent received at the time of computing income.

CONCLUSION

Tax planning to save our taxes is our right and this right will be exercised under provisions of Income Tax Act, 1961. The government has provided various Allowances, Exemptions and Deduction, by utilising the same we shall reduce our taxes. But tax avoidance and tax evasion are not allowed. You have to face tax planning problem every year and hence it is necessary to start Tax Planning at the beginning of the Financial Year. The planning at the last moment will mislead you and it may be possible that you can chose wrong instruments for investment. So, plan in time and utilise your resources appropriately.