Income from House Property

Income From House Property– What is it?

The Income Tax Act categorizes an individual’s income into five different headings for tax calculation purposes. One is “Income from Home Property”, which refers to the revenue an assessee receives from a piece of real estate. The rent received becomes taxable if the tenant is an individual who owns real estate. The term ‘annual value’ refers to either the real rent received or the hypothetical rent, but it won’t be taxed as income from home property if the taxpayer uses this property to operate or manage a business or profession. 

If any of the following circumstances exist, income from residential property becomes taxable:

• The building and/or any land it is attached to make up the house property.
• The property is owned by the taxpayer. 
• The taxpayer shouldn’t operate a business or practice law on their property.

Terminologies related to Rental Property Revenue Yearly value: 

Annual value: This is the actual rent that the property owner will earn when renting out the home.

Municipal value: This is the assessed worth of the home as determined by the local government in order to assess municipal taxes. 

Fair rent value: This is the rent that a home with identical attributes in the same neighborhood would bring in. 

Standard: In accordance with the Rent Regulation Act, the standard rent is established. The property is not allowed to charge a rent higher than the standard fixed rent if the rate has been determined for any property in accordance with the Rent Control Act. 

Gross Annual Value (GAV): This counts top among

• Rent received 
• Fair market value 
• Municipal Assessment 

In case the Rent Control Act applies, the Gross Annual value will be the highest of 

• Standard Rent 
• Rental Payment 

Net Annual value (NAV) is determined by subtracting municipal taxes from the gross annual value. 

Deductions: The following deductions can be claimed by the taxpayer in accordance with Section 24 of the Income Tax to determine the actual taxable income. 

Standard deduction: The taxpayer can claim 30% of the NAV as a deduction for rent collection, repairs, etc. regardless of the actual expenses incurred. This deduction is not allowed in the event that the GAV is nil. 

Interest on mortgage: Section 24 of the Income Tax Act allows for the deduction of mortgage interest. This section has a limit of Rs 2 lakh.

The following criteria must be met in order to claim a tax exemption on mortgage interest: 

• Loans should be obtained after April 1, 1999, for property purchases or construction. 
• The benefits can be claimed by the taxpayer for any repair or reconstruction of the existing property. 
• Processing and payment fees are considered to be interest payment. 

The construction or purchase must be completed within three years from the end of the fiscal year in which the loan was applied. 

Annual Value of Self-Occupied House Property

If the assessee is residing in the property and it is the only property owned by him or her, then the annual value of the property will be nil. If the assessee owns more than one property, all for their own use, then only one of the properties’ annual value can be designated as nil. The estimated rent of the properties will be used to determine the remaining properties’ annual value. 

Key Considerations for calculating income from House Property

Net Annual Value is used to determine the tax on the house.

If the taxpayer’s house is vacant for a certain period of time and later rented out, the computation of income from house property should be done only for the rent collected, not for the entire year. 

If the house is vacant for the entire year and the taxpayer is living in another city due to job reasons but is still paying all municipal taxes, then he may be able to deduct these expenses from other income sources during the same period. 

Ways to save Tax on Income from House Property

Following are the number of steps that an individual can undertake to reduce their tax liability on their income from house property. 

Become co-owners: If a couple has jointly taken out a mortgage, then both are eligible to claim a tax exemption for the payment of principal and interest. 

Buying a second home is a good idea: It is good to purchase a second home in the name of a spouse or any close relative if the individual has already registered one property in his or her name. This will help you avoid paying too much tax. 

Multiple property ownership: According to the Income Tax Act of 1961, if a person owns multiple houses, only one of them can be considered self-occupied. The taxpayer must evaluate the tax liability associated with each of the properties they own and occupy the one with the highest tax liability, and rent out the rest.

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