Property covered under income from house property basically comprises any building house, office building, godown, factory, hall, shop, auditorium, etc and/or any land attached to the building. Income from vacant land, however, is not covered under this head. It is covered under another category of income that is ‘income from other sources’.
When a person is using the property for the purpose of business or profession or for carrying out freelancing work then it is taxed under the ‘income from business and profession’ head and expenses on its repair and maintenance are allowed as business expenditure.
- Self-occupied property
One must know that income from a self-occupied property will always be zero or negative to the extent of interest paid or to the specified limit, whichever is lower
According to the Income Tax Act, 1961 taxable value of a self–occupied property is treated as nil. However, where more than one house property is owned by a person and neither of the properties is let out, then only 1 property is to be considered as self-occupied and the rest will be regarded as deemed to be let out. Where a property is considered as deemed to be let out, then expected rent from such property is shall be considered as taxable.
- Let Out House Property
A house property which is rented for the whole or a part of the year is considered as a let out house property for the purpose of income tax.
Following Steps to Calculate Income from House Property
- Determine Gross Annual Value (GAV) of the property: The gross annual value of a self-occupied house is always considered as zero. In case of let out property, it is the rent collected for a house on rent.
- Deduct Property Tax: Property tax paid is to be allowed as a deduction from GAV.
- Determine Net Annual Value(NAV): Net Annual Value = Gross Annual Value – Property Tax
- Reduce 30% of NAV towards standard deduction: 30% on NAV is allowed as a deduction from the NAV as per Section 24 of the Income Tax Act. No other expenses such as painting and repairs can be claimed as deduction apart from the 30% cap under this section.
- Reduce home loan interest: Section 24 is also available for interest paid during the year on housing loan availed.
- Determine Income from house property: The resulting value is income from house property.
- Loss from house property: When one owns a self-occupied house, since its GAV is Nil, claiming the deduction on home loan interest will result in a loss from house property, and the same shall be adjustable from income under other heads.
Tax Deduction on Home Loans
Tax Deduction on Home Loan Interest: Section 24
Assessee 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. The same treatment applies when the house is vacant. If the property is rented out, the entire home loan interest is allowed as a deduction.
However, deduction on interest is limited to Rs. 30,000 instead of Rs 2 lakhs if both the following conditions satisfied:
a. The loan is taken on or after 1 April 1999
b. The purchase or construction is not completed within 5 years from the end of the F.Y. in which loan was availed
Deduction limited to Rs 30,000
As it is 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 the loan was taken.
Tax deduction on a loan taken before the construction of the property
Deduction for interest on a home loan cannot be claimed when the house is under construction, Therefore, it is available only after the construction is completed. The period starting from the date of borrowing money until the construction is completed is called the pre-construction period.
Interest paid during the pre-construction period can be claimed as a tax deduction in five equal installments starting from the year in which the construction of the property is completed.
Tax Deduction on Principal Repayment
The deduction for principal repayment is available only up to Rs. 1,50,000 within the overall limit of Section 80C.
Conditions to claim this deduction-
- The home loan must be taken for the purchase or construction of a new house property.
- Until the five years from the date of possession, the property must not be sold out.
Tax Deduction for First-Time Homeowners: Section 80EE
According to Section 80EE of Income Tax Act provides that homeowners, with only one house property on the date of sanction of loan, can avail tax benefit of up to Rs 50,000.
Tax Deduction for First-Time Homeowners: Section 80EEA
One new section 80EEA is added to extend the tax benefits of the interest deduction for housing loans taken for affordable housing during the period 1 April 2019 to 31 March 2020. The individual taxpayer shall not be entitled to section 80EE deduction.
The following benefits are not available for an under-construction property.
Claiming Deduction on Home Loan
- The amount of deduction depends on the ownership share that one has on the property.
- The home loan deduction can be claimed from the financial year in which the construction is completed.
- The home loan must also be in the name of the owner. A co-borrower can claim these deductions too.
- Submit a home loan interest certificate to your employer so that employer can adjust tax deductions at the source accordingly. This document contains information on your ownership share, borrower details and EMI payments split into interest and principal.
- If you are self-employed or a freelancer, then there is no need to submit these documents anywhere, not even to the IT Department. Just calculate your advance tax liability for every quarter.
Tax Benefits on Home Loans for Joint Owners
The joint owners, who are also co-borrowers of a self-occupied house property, can eligible to claim a deduction on interest on the home loan up to Rs 2 lakh each, and deduction on the 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, deductions are allowed to be claimed in the same ratio as that of the ownership share in the property.
In order to claim a deduction you may have taken the loan jointly, but unless you are an owner in the property – you are not entitled to the tax benefits. There have been situations where the property is owned by a parent and the parent and child together take up a loan that 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.
Therefore, to claim the tax benefits on the property:
- The assessee must be a co-owner of the property
- The assessee must be a co-borrower for the loan
Maximum Rs 1.5 lakh can be claimed as a deduction by Co-owner towards repayment of principal under section 80C. This is not in addition to but within the overall limit of Rs 1.5 lakh of Section 80C. Therefore, the assessee can avail a larger tax benefit against the interest paid on a home loan when the property is jointly owned and your interest outgo exceeds Rs 2 lakh per year.
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.
