A Guide on House Property Income Tax Savings

This document covers

1. What is Rental Income?
2. Exceptions - What is not ?
3. Conditions for the income to be taxable
4. Taxability of Income from house property situated outside India
5. Types of House Property
   1. 5.1 Self-Occupied Property
   2. 5.2 Let Out Property / Deemed to be Let Out Property
6. Arrears of Rent/Unrealized Rent
7. Allowability of deductions under Old and New Tax Regime

1. What is Rental Income?

Rental income from a property (Building / Flat / dwelling) of which the taxpayer is owner/deemed owner is charged to tax under the "Income from house property". If you are a taxpayer and had a house/flat that is either rented out or kept vacant you need to know about income from house property for income tax calculation purposes.

The Annual value of any property consisting of buildings or land appurtenant thereto for which the taxpayer is the owner is chargeable under the head "Income from House property".

Learn more on @ Income under Income Tax Act — Explained

2. Exceptions - What is not ?

Annual value of the following properties cannot be considered under “Income from House Property”. Following can be considered under “Income from Business/Profession”.

1. Property occupied by the taxpayer for the purpose of any business/profession carried on by him.
2. Properties of taxpayer engaged in the business of letting out of properties.

3. Conditions for the income to be taxable under the head “Income from House Property”

1. The property should consist of building or land appurtenant thereto. Buildings includes residential building, factory building ,office shops, god owns and other commercial purpose
      NOTE

   ---

   Income from letting out of vacant land is taxable under the head “Income from Other Sources” or “Income from Business/Profession”.

2. The taxpayer must be owner of the property. Ownership includes both free hold, lease hold rights and deemed ownership.
      NOTE

   ---

   The taxpayer must be owner of house property during financial year. It is not relevant whether he is owner or not after the end of financial year. Also the requirement of registration of sale deed is not mandatory

3. The property might be used for any purpose except for the taxpayer business/profession carried on by him
4. Annual Value of house property will be charged under Income from house property even if it is held as stock in trade of the business.
      NOTE

   ---

   Income from House Properties will be treated as Nil for the properties being held as stock in trade for a period of 2 years from the end of financial year in which the certificate of completion of construction is obtained from competent authorities.

4. Taxability of Income from house property situated outside India

For Residents : Income from house property situated outside India is taxable under the head Income from House Property for residents whether such income is brought to India or not

For RNOR or NRI : Income from house property situated outside India is taxable in India only if such income is received in India. Otherwise it is not taxable in India

5. Types of House Property

5.1. Self-Occupied Property

• A self-occupied property means a property which is occupied throughout the year by the taxpayer for his residence or Unoccupied throughout the previous year
     NOTE

  ---

  Unoccupied property means property which cannot be occupied by the owner by the reason of his employment, business or profession at a different place and he resides at such other place in a building not belonging to him

• The taxpayer can declare upto 2 properties as self occupied properties and this benefit is available only to individuals/HUF.
• Property tax (Municipal taxes) paid on self-occupied properties cannot be claimed as deduction under Income from house property.
• Interest paid on Self Occupied property : The taxpayer can claim maximum Rs 2 lakhs as deduction in respect of 1 or 2 self-occupied properties if the property is acquired or constructed with capital borrowed on or after 01st April 1999 and such acquisition or construction is completed within 5 years from the end of financial year in which the capital is borrowed.
• If the property is renewed, repaired or reconstructed with the capital borrowed on or after 01st April 1999, the taxpayer can claim maximum Rs 30,000 in respect of 1 or 2 self-occupied properties

Computation

Income chargeable to tax under the head "Income from house property" in case of a self-occupied property is computed in following manner

5.2. Let Out Property/Deemed Let out property

• Let Out property : A property not occupied by the owner for his residence can be treated as a let-out property
• Deemed Let out property : If the taxpayer owns more than 2 house properties, income from any 2 such properties at the option of taxpayer can be declared as self-occupied property. The other properties can be treated as deemed let out properties.
  NOTE : This option can be changed yearly which ever is beneficial to the taxpayer. Rent need to be shown under deemed let out is higher of fair rent and municipal value but restricted to standard rent.

  ---

  • Municipal Value - Value determined by municipal authorities for levying municipal taxes
  • Fair Rent – Rent which similar property in the same locality would fetch
  • Standard Rent - Rent fixed by Rent control act
• Rent received from a let-out property/Deemed let out property chargeable to tax under the head “Income from house property”.
• Rent received by a tenant from sub-letting cannot be charged to tax under the head “Income from house property”. Such income is taxable under the head “Income from other sources” or profits and gains from business or profession, as the case may be.

Deductions

1. Standard Deduction : 30% of Annual value of property (Rental Income Less Property tax) will be allowed as standard deduction if the property is let out. It is a flat deduction, and it is allowed irrespective of the actual expenditure incurred.
2. Interest payable on loans borrowed : Interest payable on loans borrowed for the purpose of acquisition, construction, repairs, renewal or reconstruction can be claimed as deduction.
   Note 1 : Interest on Loans is allowed on accrual basis. Interest accrued but not paid can also be claimed as deduction.
   

   ---

   Note 2 : Interest on unpaid interest is not deductible.
   

   ---

   Note 3 : Interest payable on a fresh loan taken to repay the original loan raised earlier can also be claimed as deduction
   
3. Interest Paid during pre-construction period : Pre-construction period is the period prior to the previous year in which the property is acquired, or construction is completed. Interest paid during pre-construction period can be claimed as deduction over a period of 5 years(1/5th of interest every year) commencing from the year of acquisition or construction is completed
   Note 1 : Interest relating to the year of completion of construction/acquisition of property can be fully claimed in that year irrespective of date of completion/acquisition
   

   ---

   Note 2 : Interest paid can be claimed upto the maximum of interest paid against the rental income if the loan is against same property. However interest paid on property A and rental income receiving from property B can be claimed to a maximum of 2 lakhs
   
4. Property taxes : If the property is let out/Deemed to be let out, the taxpayer can claim property taxes paid as a deduction. However the property tax should be paid by the actually by the taxpayer during the financial year.
      NOTE

   ---

   Property tax paid outside India for the property situated outside India is deductible against the rental income

Computation

Income chargeable to tax under the head “Income from house property” in the case of a let-out property is computed in the following manner

6. Arrears of Rent/Unrealized Rent

• Arrears of Rent/Unrealized Rent shall be deemed to the income of house property in the financial year in which such rent is received.
• 30% standard deduction will be allowed on arrears of rent/unrealized rent
• Arrears of Rent/Unrealized Rent is taxable even if the taxpayer is not owner in the financial year of receipt

7. Allowability of deductions under Old and New Tax Regime

7a. Self-Occupied Property

7b. Let Out/Deemed Let Out Property