Income from houses is a major revenue source for many people and businesses. In India, the Income Tax Act of 1961 governs the taxation of income from house property. This blog aims to cover the types of income from house property, the tax, and how to calculate it.
Types of Income from House Property
Income Chargeable to Tax Under the Head House Property
Incomes earned from house property can be taxable
Annual Value Determination
The annual value of a property is the amount it could reasonably be rented for. Location, size, age, and condition affect the property’s value each year.
Standard Deductions
- Section 24(a): 30% Standard Deduction
A standard deduction of 30% of the net annual value is allowed from the gross rental income.
- Section 24(b): Interest on Home Loan
Interest paid on a home loan is allowed as a deduction, subject to certain limits.
Calculation Example
- Step-by-Step Calculation
Income from house property is calculated by subtracting allowed deductions from rental income.
- Common Mistakes to Avoid
Common mistakes to avoid include not claiming all the eligible deductions and not reporting all the rental income.
Income Not Chargeable to Tax under Head Income from House Property
Specific Exemptions
- Property Owned by Charitable Trusts
Income from house property owned by charitable trusts and used for charitable purposes is exempt from tax.
- Farmhouses
Income from farmhouses is not chargeable to tax under the head “Income from House Property.”
Conditions for Exemptions
- Criteria for Exemption
The property should be used for the specified purposes and should meet the criteria for exemption.
The exemption criterias are for:
- Compliance with Legal Requirements
- Non-Commercial Use
- Documentation Required
Taxpayers should maintain proper documentation to claim the exemption.
Needed documentation are Proof of Ownership, Encumbrance Certificate, Tax Receipts, NOC (No Objection Certificate).
Income from Self-Occupied Property
Definition and Criteria
Income from self-occupied property is not chargeable to tax if the property is used by the owner for personal purposes. However, if the property is let out for a period of more than 180 days in a financial year, the entire income is chargeable to tax.
Tax Implications
The tax rules for self-occupied property depend on whether the property is used for personal purposes. Or, it is let out for more than 180 days in a year.
Benefits and Deductions
- You can deduct some of the interest if you financed your self-occupied property with a home loan. Deductions have a set ceiling, so verify local regulations apply.
- You can also deduct some of the principal you repay on your home loan. This further reduces your taxable income.
Conditions for Self-Occupation
Property is self-occupied if you live there. You don’t rent it out or use it for business. You can claim up to two properties as self-occupied for tax purposes.
Home Loan Interest Deduction
- Principal vs. Interest Deduction
Taxpayers can claim deductions for both the principal and interest components of a home loan.
- Section 80C Benefits
Deductions for the principal component of a home loan can be claimed under Section 80C of the Income Tax Act.
Income from Let-Out Property
Calculation of Rental Income
Income from let-out property is chargeable to tax under the heading “Income from House Property.” The income is calculated by deducting the municipal taxes, property taxes, and other expenses from the gross rental income. Gross rental income is the actual rent received or receivable for the property.
Permissible Deductions
You can deduct municipal taxes paid, interest on borrowed capital, and a 30% standard deduction on the net annual value.
Impact on Taxable Income
The net rental income is added to the taxpayer’s total income and taxed at the applicable slab rates.
Gross Annual Value Calculation:
- Rental Income Calculation
The actual rent received or receivable for the property is considered as the gross rental income.
- Municipal Taxes Deduction
Municipal taxes paid by the owner are allowed as a deduction from the gross rental income.
Deductions Allowed
- 30% Standard Deduction
A standard deduction of 30% of the net annual value is allowed as a deduction from the gross rental income.
- Interest on Borrowed Capital
Interest is paid on a loan taken for the purchase, construction, repair, or renovation of the property. It is allowed as a deduction, subject to certain limits.
Income from Deemed to be Let-Out Property
Concept and Explanation
If a property is not actually let out but is deemed to be let out, the income is chargeable to tax. This can happen when a property is vacant for more than 180 days in a financial year.
Conditions for Deemed Let-Out Property
The property should be owned by the taxpayer and should not be used for the taxpayer’s own residence.
Tax Calculation Method
The annual value of the property is determined based on the municipal valuation or the rent that the property can fetch in the market.
Impact on Tax Liability
- Example Calculations
We calculate income from deemed let-out property by subtracting the allowed deductions. We subtract them from the property it’s annual value.
Let’s say your property is vacant. Its municipal value is Rs. 20,000 per month. Here’s how it might affect your taxes:
Taxable Income: You are not receiving rent. But, the taxman sees the municipal value as your “deemed rental income.” This Rs. 20,000 multiplied by 12 months (Rs. 2,40,000) becomes part of your taxable income for the year.
- Planning and Compliance
Taxpayers should plan how they use their property. They should follow the Income Tax Act to lower their taxes.
How to Calculate Income from House Property?
Step-by-Step Guide to Calculate Income from House Property
- Calculation of Gross Annual Value
The gross annual value of a property is determined based on the actual rent received or receivable or the municipal valuation.
- Deductions under Section 24
Deductions under Section 24 include municipal taxes paid and interest on borrowed capital. They also include a standard deduction of 30% of the net annual value.
Examples and Scenarios
- Self-Occupied vs. Let-Out Properties
The calculation of income from house property differs for self-occupied and let-out properties.
Let’s say you live in your property. In this case, you wouldn’t get rental income. There’s no income to calculate from the property. But, you may be able to deduct some home loan interest on your taxes.
- Handling Multiple Properties
Taxpayers with many properties should calculate the income from each one separately. They should report the total income as “Income from House Property.””
Tools and Resources
- Online Calculators
Online calculators can help taxpayers estimate their house income. They can also estimate the resulting tax.
- Tax Consultation Services
Taxpayers can ask tax professionals for advice. This will ensure accurate calculation and compliance with the Income Tax Act.
Conclusion:
Income from house property is one of the primary sources of income for many people and also for the business entities. So, by following the blog’s advice, you can avoid breaking the Income Tax Act and cut your taxes.
FAQ
What is Exempted House Property Income?
Income from house property that belongs to charitable trusts is tax free. The trusts use it for charitable functions. Even the income from farmhouses is exempted from the tax under the “Income from House Property.”
How Many Types of Income from House Property?
Income from house property can be classified into three main types: self-occupied, let-out, and deemed to be let-out.
Is Income from House Rent Taxable?
Yes, income from house rent is taxable under the head “Income from House Property.” The rent received is the gross income. Deductions are allowed for taxes and expenses.
What is Income from House Property Section 22?
Section 22 of the Income Tax Act of 1961 defines the procedure of determining income from house property. It details how the gross rental income is computed, the allowable deductions, and net rental income amount. This section also defines the factors that determine whether a property is considered to have been let out.