Basics of House Property
A house property could be your home, an office, a shop, a building or some land attached to the building like a parking lot. The Income Tax Act does not differentiate between a commercial and a residential property. All types of properties are taxed under the head ‘income from house property’ in the income tax return. An owner for the purpose of income tax is its legal owner, someone who can exercise the rights of the owner in his own right and not on someone else’s behalf.
When a property is used for the purpose of business or profession or for carrying out freelancing work – it is taxed under the ‘income from business and profession’ head. Expenses on its repair and maintenance are allowed as business expenditure.
1. Self-Occupied House Property
A self-occupied house property is used for one’s own residential purposes. This may be occupied by the taxpayer’s family – parents and/or spouse and children. A vacant house property is considered as self-occupied for the purpose of Income Tax.
Prior to FY 2019-20, if more than one self-occupied house property is owned by the taxpayer, only one is considered and treated as a self-occupied property and the remaining are assumed to be let out. The choice of which property to choose as self-occupied is up to the taxpayer.
For the FY 2019-20 and onwards, the benefit of considering the houses as self-occupied has been extended to 2 houses. Now, a homeowner can claim his 2 properties as self-occupied and remaining house as let out for Income tax purposes.
2. Let Out House Property
A house property which is rented for the whole or a part of the year is considered a let out house property for income tax purposes
3. Inherited Property
An inherited property i.e. one bequeathed from parents, grandparents etc again, can either be a self occupied one or a let out one based on its usage as discussed above.
Steps to Calculate Income From House Property
Here is how you compute your income from a house property:
- 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.
- Reduce Property Tax: Property tax, when paid, is allowed as a deduction from GAV of property.
- 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 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.
- Reduce home loan interest: Deduction under Section 24 is also available for interest paid during the year on housing loan availed.
- Determine Income from house property: The resulting value is your income from house property. This is taxed at the slab rate applicable to you.
- 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.
Note: 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.