Introduction
As we know there are 5 heads falling under Income tax Act which are Income from salary, income from House property, profit & gains from Business & Professions, capital gains and income from other Sources.
An Assesse has to bifurcate his earnings into these heads if computing his tax liability.
Basics of House Property Tax
Let’s dive into one of the heads of Income tax (Income From House property). In this article, you will learn about all Provisions & deductions that falls under the said Head.
As we know if any Assesse is earning any rent income from the property the same will be taxable under the said Head. How such things are going?
First of all, let’s Check out the Section Highlights.
- Section: 22 (Charging Section)
- Section: 23 (Computation of Annual Value)
- Section: 24 (Deductions)
- Section: 25 (Deductions not allowed)
- Section: 25A (Recovery of unrealised rent &Arrears of rent)
- Section: 26 (Co-owners)
- Section: 27 (Deemed Owner)
Annual Value of Property(Section: 22)
An Income being the Annual Value of property will chargeable as income from House property if,
- Assessee is Owner property
- Property is Self Occupied (own residence) or Let out(for any purpose)
- Property has not used for his own Business & Profession
Here the Annual Value of Property* will be taxable.
*Property includes buildings or lands appurtenant thereto of which the assessee is the owner.
How to determine NAV (Section 23)
The steps to determine NAV under section 22 are:
For Let out Property
Step 1: Compare the Municipal value(Annual renting value as per municipal records) of Property with Fair Rent (Rent of similar properties in nearby area or same locality) & take whichever is HIGHER.
Step 2: Compare value as per Step 1 with Standard rent. Take the lower of these two values. This is the Reasonable Expected Rental amount.
Step 3: Compare Reasonable Expected Rent (Step 2) with Actual Rent (Received or Receivable) & take Whichever is HIGHER& you will get GROSS ANNUAL VALUE.
After Deducting Municipal Tax & local Tax PAID BY OWNER you will get NET ANNUAL VALUE (NAV)
For Self Occupied Property
When an Assesse has occupied the property for his residence & not occupied the property due to employment at other place then the property said to be Self Occupied & NAV for the said Property will be NIL.
How to calculate Income From House Property For Self-Occupied and Let Out
Note : Deduction @ 30% will be on Net Annual Value
Available Home Loan Interest Deductions (Section 24)
After computing NAV let’s check if any Deductions allowed under the said Head.
Yes, under section 24 Deductions are applicable as follows,
Section 24 subsection-
- Provides a sum equal to thirty percent of the annual value.
- Where the property has been acquire, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital.
For subsection (b) certain conditions need to be follow as under –
- When loan taken for the said purpose under sub sec (b) then interest will allow on due basis.
- Only original interest will be allowable (interest on interest or any penalty won’t).
- If Assesse has taken a Subsequent loan to repay the previous loan then interest or a subsequent loan will be allowed, provided that it also taken for the same purpose.
- To avail the Interest as a deduction interest certificate needs to be furnished.
Pre & Post Construction Interest Calculation
If an Assesse has taken loan for the purpose of construction of his property then such interest cannot be taken as deduction till the completion of construction.
Hence, such PRE-CONSTRUCTION interest will be accumulated & claimed as a deduction in five equal installments from the year of completion of construction.
Interest payable for the year of completion of construction (irrespective of date of completion) will be claimed as Post interest in the same PY itself.
Calculation of Pre-construction interest
For the said purpose interest form
DATE OF LOAN
To
(i) Date of final Repayment of loan
(ii) Immediate 31st March of preceding PY of completion of construction
(i) Or (ii) whichever is earlier
Let’s take an example to understand the same
- Date of loan: 01/09/18
- Date of repayment of loan : 01/01/23
- Date of completion of construction: 01/10/21
- Amount of loan Rs. 20 lakhs @12% p.a. (loan for construction purpose)
- Calculate interest allowed us 24(b)
Solution
Let’s first calculate of Pre-construction period (Date of loan: 01/09/2018)
| To (i) Date of final Repayment of loan: 01/01/2023 (ii) Immediate 31st March from the completion of construction: 31/03/2021 We less……. i.e. 31/03/2021 Hence, pre-period will be: 01/09/18 to 31/03/21 i.e 31 Months |
| Interest for pre-period: (20,00,000 @ 12% for 31 Months) i.e. 20,00,000 * 12% * 31 / 12 | Rs. 6,20,000 |
| Hence, pre-period interest is to be claimed in Five installments = 6,20,000/5 | 1,24,000 p.a. from PY 21.22 |
Deduction of interest in every PY for 5 years will be as follows:
| PY | Pre | Post | Total Interest allowed |
| 21-22 | 1,24,000 | 20 lakhs @12%i.e 2,40,000 | 3,64,000 |
| 22-23 | 1,24,000 | 20 lakhs @12%for 9M i.e 20L@12%*9/12 = 1,80,000 | 3,04,000 |
| 23-24 | 1,24,000 | NA | 1,24,000 |
| 24-25 | 1,24,000 | NA | 1,24,000 |
| 25-26 | 1,24,000 | NA | 1,24,000 |
Maximum allowable Interest on Home Loan
In let out house (including Deemed let out), full interest can be claimed as deduction.
In Self Occupied Property, Amount of Deduction will be restricted as below :
Note:
(i) if loan has taken for the purpose of repair & maintenance then the maximum allowable interest will be Rs.30,000 irrespective of date of loan.
(ii) If an Assesse has taken loan after 01/04/1999 for construction of the property then the amount of deduction will be restricted to Rs. 30,000 if construction has not been completed within 5 years from the end of PY in which loan has taken.
When Deduction are not allowed (Section 25)
Notwithstanding anything contained in section 24, any interest chargeable under this Act which is payable outside India shall not be deducted in computing the income chargeable under the head “Income from house property”.
Arrears of rent & unrealised rent (Section 25A)
Such section contains special provisions regarding arrears of rent (rent which remains unpaid after the date on which it becomes due and payable) & unrealised rent (the portion of the rent that the property owner could not recover from the tenant) as below:
- The amount of arrears of rent received from a tenant or the unrealised rent realised subsequently from a tenant, as the case may be, by an assessee shall be deemed to be the income from house property in respect of the financial year in which such rent is received or realised, and shall be included in the total income of the assessee under the head “Income from house property.
- 30% of standard deduction are allowed under section 25A.
Co-owners (Section: 26)
Where property consisting of buildings or buildings and lands appurtenant thereto is owned by two or more persons and their respective shares are definite and ascertainable, such persons shall not in respect of such property be assessed as an association of persons, but it will be assessed as their individual income from the property as per section 22 to 25
Deemed owner (Section: 27)
The circumstances in which Assesse will be consider as Deemed Owner are:
- An individual who transfers otherwise than for adequate consideration any house property to his or her spouse, not being a transfer in connection with an agreement to live apart, or to a minor child not being a married daughter, shall be deemed to be the owner of the house property so transferred
- The holder of an impartible estate shall be deemed to be the individual owner of all the properties comprised in the estate
- A member of a co-operative society, company or other association of persons to whom a building or part thereof is allotted or leased under a house building scheme of the society, company or association, as the case may be, shall be deemed to be the owner of that building
- A person who is allowed to take or retain possession of any building or part thereof in part performance of a contract shall be deemed to be the owner of that building