How income from house property is taxed? A complete guide

Understanding how income from house property is taxed is important to managing your personal finances and getting the most out of your investment. As the deadline for filing Income Tax Return (ITR) is approaching, you should be ready with all your income and tax saving proofs to claim exemptions. The rental income from any residential house, shop or commercial property is taxable and it should be reported under ‘income from house property’ during ITR filing.

If you find yourself a bit lost in the labyrinth of taxation jargon and legal terms, here’s a step by step guide to understand the entire process of taxation on income from house property and possible exemptions that you could claim.

What is income from house property?

The term 'house property' in the tax world is a little broad. It can refer to your residence, a bustling office space, a retail shop, or any kind of commercial building like a factory or godown. It even includes the land attached to the building, like the parking lot where you park your car. For tax purposes, all types of properties, whether residential or commercial, are bundled together under 'income from house property'.

However, if you use your property for your own business, it comes under 'income from business and profession', and the maintenance expenses are considered business expenditure.

Classification of house property

As per the tax rules, your house property can fall into one of three buckets:

1. Self-Occupied house property

If you're living in your own property, it's considered a self-occupied house property. Even if it's vacant, it falls under this category. But remember, if you have more than one property and you're not renting out any of them, only two are considered self-occupied, and the rest are treated as let out properties for tax purposes.

2. Let out house property

If you're renting your property, whether for the whole year or part of it, then it is classified as a let-out house property.

3. Inherited property

If you've received a property as a part of inheritance from your parents or grandparents, it's termed as an inherited property. This property can be either self-occupied or let out, depending on how you choose to use it.

Calculating income from house property

When it comes to calculating the income from your house property, you have to consider several factors. Here's the step-by-step process:

Figure Out the Gross Annual Value (GAV): For Income Tax purposes, the GAV for a self-occupied house is zero. For a property you rent out, the total rent you collect in a year is considered as the GAV.

Subtract Property Tax: Whatever property tax you've paid gets subtracted from the GAV. The amount after deduction of the municipal tax is called Net Annual Value (NAV) and this amount is taxable subject to deductions.

Take Away 30 per cent of NAV: Section 24 of the Income Tax Act gives you a standard deduction of 30 per cent of NAV.

Subtract Home Loan Interest: If you're paying interest on a home loan you can claim exemption up to Rs 2,00,000 under Section 24 (B).

Find Your Income from House Property: What you're left with is your taxable income from house property.

Account for loss from house property

If the property is self-occupied and you are paying home loan interest which is higher than the permissible exemption limit of Rs 2 lakh, you can set-off the rest of the amount against other income of the current year. The loss amount can only be adjusted up to a maximum of Rs 2 lakh in the current financial year and the rest of the amount can be carried forward for the next 8 AYs.

Deductions on home loan interest rates

If you or your family are living in the property, you can claim a deduction of up to Rs 2 lakh on the interest part of your home loan. If the property is rented out, you can claim the entire interest as a deduction. However, under certain conditions, this deduction might be capped at Rs 30,000 if the loan has been taken on or before 1 April 1999.

Tax deduction on principal repayment

Thanks to Section 80C of the Income Tax Act, you can claim a deduction of up to Rs 1,50,000 for the principal repayment of your home loan. But remember, certain conditions apply here.

Deduction for first-time homeowners: Sections 80EE and 80EEA

For first time home buyers Sections 80EE and 80EEA offer extra tax benefits. Section 80EE allows for an additional tax deduction of up to Rs 50,000 towards home loan interest payments. Section 80EEA gives a special deduction for housing loans taken for affordable housing during the period from 1 April 2019 to 31 March 2020.

Paying Rent and Owning a Home: House Rent Allowance and Deduction on Home Loan

Living in a rented place while your own house is rented out or vacant? You can claim the House Rent Allowance (HRA) deduction for the rent you're paying. Plus, you can also claim a deduction on the interest of your home loan.

Tax benefits on home loans for joint owners

If you co-own a property and have a joint home loan, each owner can claim a deduction on the home loan interest up to Rs 2 lakh and on principal repayment up to Rs 1.5 lakh.