Best Ways To Calculate and Save Income From House Property

Income From House Property
  • By definition by law, a ‘house property’ is any building or land owned by a taxpayer. Such buildings may used for commercial or residential purposes.
  • Income from house property includes Flats, shops, workplace areas, works sheds, business buildings, agricultural land, farmhouses, etc.

Meaning Of Income From House Property

  • The Income Tax Act divides the income received by an individual into various sections to simplify the tax calculation.
  • Income derived from a household property as rental income or through its transaction referred to as ‘income from the house property.
  • It should be an overhanging structure with occupancy capacity.

The building should be the most important part of the said property covering the land and the building.

Income from house property = Standard deduction (30% of NAV) – Interest on borrowed capital (if applicable).

Types of House Property

Self-Occupied House Property

Owned property is home property used by its owner. I.e. self-occupied property used and owned by the same person.

Fiscal Year (FY) -19-20 and thereafter, you can declare two houses as self-occupied property that once existed as a property.

Let-out house Property:

The house property is rented by its owner for a period (part or all). Income from such property is taxable under the Income Tax Act.

Inherent house property

If you are the heir of money or property, you will receive it from the deceased.

Important Terminologies Related To House property

Annual Value:

  • This is the annual value of property capable of earning income.
  • The term annual value is very important as the calculation of income from house property depends upon correctly calculated annual value

               Annual value = NAV Deductions.

Four Factors of Annual Value

1. Municipal value:

  • This is the value of your property dealer near valued by the municipal authorities in which they collect municipal taxes.
  • Before awarding municipal value, there are many factors that municipal officials need to consider.

2. Reasonable rental value:

Reasonable rental value is the value of a single property with similar features in the same (or similar) area.

3. Fixed rent:

  • Under the Rent Control Act, fixed rent is fixed and landlords cannot receive more rent than specified in the Rent Control Act.
  • This law ensures that landlords are paid fair rent, that tenants are not exploited, and that they are protected from eviction.

4. Actual Rent Received / Receivable:

This is the actual amount of rent received by the landlord from the tenant, depending on who pays the water, electricity, and other utility bills.

Gross Annual Value of Property

This is the highest among

Rent received or receivable

The rent receivable is the property account in the landlord’s public bargain, which reports the amount of rent received on the balance sheet date.

Fair Market Value

Fair market value is the price at which a property is sold in the open market when certain conditions are met.

Conditions

The parties involved are aware of all the facts, act in their own interest, are under no pressure to buy or sell, and have ample opportunity to make decisions.

Municipal Valuation

  • The municipal valuation of your property will be published by the municipal authority in that area as fees for different areas.
  • Property tax payable to local authorities will be calculated based on this estimate.
  • Today, many municipalities offer online facilities for calculating and paying property taxes.

Calculation of Gross Annual Value of Property

  • Gross periodic value (GAV) refers to the income that can be earned from the immovable property.
  • The GAV applies regardless of whether the property was released for commercial or residential purposes.
  • The Gross Annual Value (GAV) is used to calculate the tax or rent to be used on the property.
  • The total annual value should be higher than the expected rent or higher than the rent received for the lead-out period.

Gross Annual Value of House Property:

Example:

 

Fair Rent (Rs 75000 * 12)

90,00,000/-

Municipal Value (Rs 72,000 *12)

8,64,000/-

Standard Rent (Rs 80,000 * 12)

9,60,000/-

Actual Rent (Rs 5,00,000 * 8 and SOP for 4 months)

40,00,000/-

 

Particulars

Amount

Fair Rent 

A

Municipal Value

B

Higher of A and B

C

Standard Rent

D

Expected Rent (Lower or C and D)

E

Actual Rent

F

GAV (Rose of E and F)

G

If the Rent Control Law Applies, The GAV will be Higher:

Net Annual Value (NAV):

NAV =Gross annual value – Municipal tax

Exemptions:

Under Section 24 of the Income Tax Act, two exemptions are allowed for actual taxable income from house property.

Legal Deduction:

 30% NAV exemption on repairs, rent, etc., regardless of the actual cost. If the annual value is zero, this exemption is not allowed.

Interest on borrowed capital:

If borrowed to buy/build a house, the deduction is allowed on the basis of earnings.   Rs.30,000, and real interest, whichever is less

Owner / Estimated Owner:

  • Income from house property is taxable to the property owner. The owner is entitled to income from the property.
  • This means that the person who benefits financially from the property will be charged income even if the property is not registered, i.e. considered as the owner.
  • An Ownership and Documented Registration is not required by a Considerable Owner Sign.

Deductions Out of Net Annual Value (NAV) of House Property Income (Section 24)

  • Deductions are allowed in Net Annual Value (NAy) when calculating home property income.

These exceptions are as follows

1. Standard Deduction [Section 24(a)]

  • The standard deduction is 30% of the net annual value calculated above. This 30% deduction is allowed even if your actual cost on the property is higher or lower.
  • Section 24 of the Income-tax Act provides that homeowners pay Rs. Let’s claim exemption up to. 2 lakhs (Rs. 1,50,000 if you file income for the last financial year) on their home loan interest if the owner or his family resided in the home property.
  • Interest is fully deductible when the house is for rent.

2. Interest on the home loan or loan capital [Section 24 (b)]

  • If the property is purchased, built, repaired, renovated, or refurbished with borrowed capital, interest payable on such capital is allowed to be deducted.
  • The interest payable annually is calculated separately and deducted each year.
  • It does not matter whether the interest was actually paid or not during that year.

Income from House Property Calculation

  • Income from the home property is income from property owned by an individual.

Income from house property = Standard deduction (30% of NAV) – Interest on borrowed capital (if applicable)

For Example,

You have a property and Rs. Suppose you are charging. 25,000 rent per month. If you have Rs. 15,000 in municipal taxes for that year, and Rs. 75,000 interest on borrowed capital.

Solutions:

Given Data,

Total annual rental income value = 25,000/-

 Municipal Taxes = 15,000/-

Interest on borrowed capital (if applicable) = 75,000/-

Income from house Property = ?

 

Income of House Property

Amounts (in Rs.)

Total annual rental income value

25,000 x 12 =3,00,000/-

Less: Municipal Taxes

15,000/-

Net Annual Value (NAV)

3,00,000-15,000=2,85,000/-

Deductions under Section 24

 

Standard deduction (30% of NAV)

2,85,000 – 85,500 = 1,99,500/-

Interest on borrowed capital (if applicable)

75,000/-

Income from House Property

1,24,500/-

When is the Annual Value NIL?

  • If the owner is a resident of his property (self-occupied property or SOP) and does not receive a financial benefit from it, the annual value will be considered zero.
  • If the owner of the property leaves the city and moves to another city for his property work.
  • Resides on a rental property that does not belong to him, it will be null or void.

How to Save Tax on Income From House Property

  • There are generally two conditions for collecting income under head home property, ownership and building,
  • If you own a building and own, you can charge under income from house property whether you own or occupy your income.
  • The point to note here is that ownership includes the right to benefit when calculating the tax on home property.

Careful planning can save a considerable amount of money from taxation. Here are some things you can do to save tax:

Joint Home Loan

If you own a property jointly with one person and apply for a joint home loan with your partner, you will both have to pay up to Rs. Rs. 1,50,000 each.

Are you planning a second home?

If you already have a self-occupied property registered in your name and want to avoid paying taxes on the second home, register the second property in the name of your spouse / relative to avoid excessive taxation.

Joint ownership

The tax on income from house property can be split between co-owners, thus reducing the burden.

Ownership of more than one property

  • If you have multiple properties, only one of these will be registered as your residence and fall under the Self-Occupied Property (SOP).
  • It is important to the tax liability on all of your assets, choose the one with the highest tax liability to call home, and dispose of the rest.
  • You can change the SOP every year.

Vacant homes

You own will still be taxed based on a reasonable rental value, so it is best to leave out all of the vacant property so that you do not incur any income or loss due to taxation.

Tax Deduction for House loans

Below is some sections of the Income Tax Act that exempt home loans:

  • Section 24- Duty Deduction on Home Loan Interest
  • Section 80C- Duty deduction on top prepayment
  • Section 80EE- Duty Deduction for First Time Homeowners

Section 24- Duty Deduction on Home Loan Interest

  • Section 24 of the Income-tax Act provide that homeowners pay Rs.
  • Let’s claim exemption up to. 2 lakhs (Rs. 1,50,000 if you file income for the last financial year) on their home loan interest if the owner or his family resided in the home property.
  • Interest is fully deductible when the house is for rent.

Section 80C- Duty deduction on top prepayment

  • Under Section 80C of the Income Tax Act, the maximum deduction allowed for repayment of a home loan is Rs. 1.5 lakhs.
  • Exemptions under Section 80C also include investments in Public Provident Fund (PPF) accounts, equity-based mutual funds, tax-saving fixed deposits, and national savings certificates.

Section 80EE- Duty Deduction for First Time Homeowners

  • Section 80EE allows income tax deductions for the interest part of a residential home property loan obtained from any financial institution.
  • Exemptions of up to 50,000 / – in a financial year under this category.
  • You can continue this deduction until you repay the loan in full.

Important Points for Income From House Property

  • The purpose of the head of income under this heading is only the income of the land associated with the buildings or structures.
  • The annual value of the property should be taxed and not the actual rent received.
  • The appraiser must be the owner of the property. ⁇
  • The appraiser may not use the property for business or professional purposes buy land.
  • In the event of a dispute over ownership, the beneficiary will pay the tax until the dispute is resolved.
  • Leaving the property to run the appraiser’s business or business is not considered income from house property. ⁇
  • Income from the sublimation of home property is taxable as income from other sources, not house property income.

Advantages of “Income from House Property”

  • If the home property is self-occupied, the interest on an individual home loan will be Rs. Exemption up to Rs 2 lakh can be claimed.
  • However, if the house property is held, the two homeowners will have to pay Rs. Interest up to Rs 2 lakh can be deducted

Conclusion

  • If the property is used for business and not for residential purposes, no income is considered under the heading “Income from house property”
  • Rental expenses related to the home property are not allowed under the head. “Income through business and industry.”
  • Home is a basic need of everyone and if you buy a house, you need to know that there are ways to earn income from house property.
  • Or, you can deduct your taxes under Section 80 EE and Section 80 EEA, which will benefit you.

FAQ

1. Which section collects income from household property?

Section 22 of the Income Tax Act is the section that collects income from household property

2. What is the interest rate for a home loan?

Under Section 24, the limit for interest deduction for the self-occupied property is INR 2 lakhs.while for Led-out property there is no limit limited under this section.However, if the loan is taken to repair or renovate the self-occupied property, the limit is Rs 30,000.

3. Can I deduct the loan amount for the construction of my shop?

No, the preference for loan amount under Section 80C is for residential purposes only and not for business purposes.

4. What are the various composition of income of house property?

(i) Actual rent received or receivable (ii) Municipal Value (iii) Fair Rent (iv) Standard rent

5. Which of the following is taxable as income from house property?

  • Income from House Property Becomes Taxable If the Following Conditions Are Met: 
  • The house property comprises the building and/or any land attached to it.
  • The taxpayer is the owner of the property.

 

6. What is computation of income from house property?

  • Income from house property is the A.V. minus the following deduction. ( These are exhaustive and no other deductions are available):- 
  • (a) A sum equal to 30% of the A.V. as computed above in case of let out property. 
  • In case of self occupied property, since the A.V. is taken at Nil, 30% deduction is not allowed on it
  • Income from house property = Standard deduction (30% of NAV) – Interest on borrowed capital (if applicable)

7. Which of the following amounts is not allowed for deduction from income from house property?

  • Brokerage or commission paid to acquire an asset is not allowed as a deduction. Interest paid on a home loan: 
  • Any Interest paid/payable on the loan taken for acquiring, constructing, or repairing the property is allowed as a deduction from the income from that house property

8. Calculation of construction period in income from house property

  • It is from the year of home loan taken till the year in which construction is completed. 
  • However, the interest will be allowed from the date of loan taken till the 31st March before the financial year in which construction is completed.

9. What are the conditions for income from house property?

  • The house property comprises of the building and/or any land attached to it. The taxpayer is the owner of the property.
  • The taxpayer should not use the house property to run any business or profession.

10. Can we charge depreciation on self occupied properties?

Self-occupied property cannot enter into block of depreciable asset

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