Income from House Property is clubbed with the total income while filing Income Tax Return. One of the most common query i received is on how to calculate income from House Property. Income from House Property arises when you have a property which is Let out Property i.e. you receive Rental Income from such property. Though this head is titled as Income from House Property but it is not necessary that you only gain income from House property. In case of Home Loan, Income from House Property can be negative i.e. you may incur Loss from Let out property when Home Loan Interest outflow outweigh the Rental Income. In another scenario, in case of Self occupied property for sure you will incur Loss from Self occupied property as Gross Annual Value of Self occupied property is Zero subject to max limit under income tax act. Any loss from self occupied property is also reported under Income from house property. We will discus loss from self occupied property towards the end of this post. Lets check out calculation of Income from House Property in case of Let out property.
Calculation of Income from House Property is very complicated in case you have multiple properties either within city of residence or in different cities. As per Income Tax department, Basic thumb rule is that if you have 2 properties then 1st one is considered as self occupied and 2nd one is Let out property. It is your choice, which one you declare self occupied and by default 2nd one is Let out Property. Through intelligent tax planning, “Income from House Property” can help you save income tax on Mortgaged Let out property. In short, if you have availed Home Loan on Let out property then you can claim income tax deduction on interest component at actual value i.e. actual interest paid and claim Loss from Let out property. Please note that this section/head is not applicable for clubbing income from letting out land parcel or vacant plot. Income from Vacant plot is clubbed/taxed under Income from other sources or Business Income. Only exception is land which form part of building like courtyard etc which can be charged under Income from House Property. Income from any structure like residential/commercial unit including shop,godowns, office, agricultural land, manufacturing unit etc which can be rented out is clubbed under Income from House Property. If the property is used for own business or profession then it cannot be taxed under Income from House Property.
Some of the most common scenarios of Income from House Property which is Let out are
1. You own a property but it is located in different city i.e. you stay in city A and property is in city B
2. You own 2 properties in same city. In this case, it is beneficial to declare property on Home Loan as Let out and 2nd one as self occupied. It is your choice to declare a particular property as Self occupied or Let out. In case both properties are on Home Loan then the property with max interest outflow can be declared as Let out property and other one as self occupied property.
3. Though it can be disputed but if you have single property in same city of residence then you can rent out your property and declare it as Let out property. You can stay on rent near to your workplace. You can also claim HRA in this case. Only catch is that you need to prove that your workplace is far from from your own property.
Rental Income from House Property
Calculation of Rental income is most tricky party. In order to save tax, a tax payer would like to declare lowest rent but it is advisable to calculate rental income in fair and transparent manner as per income tax act. In many cases, i observed that my clients declared 2nd property as vacant therefore zero rental income. Unfortunately, even if the property is vacant you need to declare notional or fair rental value of property for Income tax purpose. Income from vacant house can be declared under Income from other sources in ITR whereas self occupied and rented property is declared under head Income from House Property. Rental income is also loosely referred as Net Annual value of House Property. There are 4 standard methods to calculate rental income. I will explain with an example for easy calculation
A = Actual Rent Received: For let out property, actual rent received is as per agreement between owner and the tenant. Any payment by tenant on behalf of owner is also clubbed under Actual Rent Received. Example: Tenant is paying a rent of Rs 15000 per month to owner for property A
B = Fair Rent: It means how much rental income a similar property in vicinity can fetch with similar facilities and amenities. Example: Fair Rent for Property A is Rs 17000 per month
C = Standard Rent = Rent fixed under Rent Control Act: States like Maharashtra have Rent control act, under which rent specified under Rent Control Act is fixed even if is meager amount. Example: Standard Rent of Property A is Rs 12000 per month
D = Municipal Value: It is similar to circle rate or guidance value. Rental value is fixed by local municipal corporation or municipal committee. Example: Municipal value of property A is Rs 10000 per month
After calculating above mentioned values, Notional Rental Income from House Property can be calculated as per following formula as mentioned in income tax act.
Z = Higher of B or D i.e. Higher of Fair Rent Value or Municipal Value. In this case it is higher of Rs 17000 or Rs 10000 = Rs 17000 per month
Y = Expected Rent = Lower of Z or C i.e. Lower of Rs 17000 or Rs 12000 = Rs 12000 per month
Gross Annual Value of Property = Higher of Expected Rent or Actual Rent Received = Higher of Y or A i.e. Rs 12000 or Rs 15000 = Rs 15000 per month or Rs 1,80,000 p.a.
Therefore in this case, Actual Rent Received is Gross Annual Value of Property. Though it may not be true every time. In most of the cases, Actual rent received is Gross Annual Value of Property for the purpose of calculation of Income from House Property.
If in your area, any particular value is not available or not declared then you can take it as Zero.
Net Annual Value is Gross Annual Value minus Municipal taxes like property tax, sewerage tax etc.
Imp Point: For calculation of Net Annual Value, the Municipal Taxes for Income from House Property will be considered as Zero if it is not paid by the owner of the property. For e.g. If municipal taxes is paid by the tenant then it will be clubbed under Actual Rent Received therefore will be Zero and Net Annual Value will be same as Gross Annual Value.
Assuming Rs 10,000 as Municipal taxes per annum paid by owner in this case. Net Annual Value = Rs 1,80,000 – Rs 10,000 = Rs 1,70,000
Imp Points: If the property was let out for part of year and vacant for rest of the year. In this case, assuming Actual rent received is less than value of Y. Only for this scenario actual rent received will be considered as Gross Annual Value of Property even though it is less than Y.
Standard Deduction on Income from House Property
After calculating Net Annual Value of Property, we need to adjust Standard Deduction from Net Annual Value. Income Tax Act provide 2 types of Standard Deduction from Net Annual value for calculation of Income from House Property (Let out property)
(a) Deduction on Repair and Maintenance: 30% of Net Annual Value is allowed as Standard Deduction towards the repair and maintenance of property irrespective of actual expenditure. This is applicable only for Let out property not for self occupied property.
(b) Deduction on Home Loan Interest (Interest on Borrowed Capital): For let out property, Actual Interest paid on Home Loan during Financial year is allowed as deduction for calculation of Income from House Property. Besides Home Loan, if the loan is availed for repair, construction, extension or renewal of property, the deduction on interest component is allowed at actuals. Any brokerage or commission for Home Loan is not allowed as deduction.
Assuming actual interest paid during Financial year is Rs 3,00,000. Therefore Income from House Property will be calculated as follows
Income from House Property = Net Annual Value – 30% of Net Annual Value – Actual Interest Paid on Home Loan
Income from House Property = 1,70,000 – 30% of 1,70,000 – 3,00,000 = – 1,81,000
In this case there is a loss of Rs 1,81,000 from let out property. This loss can be adjusted against income in ITR under the head income from house property thus it will reduce income tax liability.
Self Occupied Property
In case of Self occupied property, Gross annual value is NIL as property is not on rent. Net Annual Value is also NIL as you cannot deduct Municipal Taxes for self occupied property.
Standard deduction towards repair and maintenance is also not allowed. You can only avail deduction towards Interest on Borrowed capital i.e. Home Loan Interest subject to max limit of Rs 2,00,000 (Increased to 2,00,000 in budget for FY 2014-15 from Rs 1,50,000 in FY 2013-14). Considering the same example and assuming same property A is self occupied instead of being let out. Actual interest paid is same Rs 3,00,000. Income from House Property for self occupied property can be calculated as follows
Income from House Property = Net Annual Value – 30% of Net Annual Value – Interest Paid on Home Loan (Subject to max limit of Rs 2,00,000 in case of Home Loan and 30,000 if the loan is availed for repairs, renewal etc)
Income from House Property = NIL – 30% of Net Annual Value i.e. NIL – Interest Paid on Home Loan (Subject to max limit of Rs 2,00,000 or 30,000 as the case may be) i.e. Rs 2,00,000 (Assuming Home Loan scenario)
Income from House Property = -2,00,000
In this case there is a loss of Rs 2,00,000 from self occupied property. This loss can be adjusted against income in ITR under the head income from house property thus it will reduce income tax liability.
The plus point of self occupied vs Let out property is that you can claim deduction on principal component u/s 80C subject to max limit of 1.5 lakh u/s 80C.
In case of Joint ownership, Both the owners can claim gain or loss from house property i.e. income from house property is divided in proportion of ownership.
Hope you liked the post. I tried to cover all possible scenarios and explained the concept of income from house property in simplistic manner. For any queries and clarification, you may post your comments. You can also share this post with your friends and family members through social media icons.
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