What is loss from house property in income tax?

By
Rajat Piplewar

Understanding Income from House Property: A Comprehensive Guide

When it comes to the Indian Income Tax Act, income from house property can be a double-edged sword. It can either be profitable or unprofitable. Interestingly, you have the option to report a loss from house property when declaring your income. If you incur a loss in this category, you can offset it against other income generated in the same financial year. Let’s dive into the nitty-gritty of how this works and what it means for you.

What is Loss from House Property?

The term “Loss from House Property” describes a situation where the costs of maintaining or owning a property exceed the rental income generated from it. In the context of income tax, this concept is used to categorize the income or loss related to house property separately from other types of income.

Reasons for Incurring Loss from House Property

Interest on Borrowed Capital

Primarily, losses occur due to claiming a deduction on interest on borrowed capital. If you buy or build a house using your own money, you won’t have such deductions. However, if you use borrowed money, the maximum deduction is for the interest you pay.

Loss from Self-Occupied Property

Self-occupied properties are those used by the taxpayer and their family as a residence. If a property is vacant, it also counts as self-occupied. Before FY 2019-20, you could only consider one property as self-occupied, and the rest were assumed to be rental. Now, you can claim two properties as self-occupied and one as let out, which is a great way to save on taxes.

If you live in your property, its Gross Annual Value (GAV) will be zero. Section 24 of the IT Act states that the taxes paid and interest on your home loan will lead to a loss from house property. The maximum deduction allowed for interest on a home loan is Rs 1.5 lakhs.

Loss from a Let-Out Property

For let-out properties, the GAV will not be zero. If the claimed deductions exceed this value, the property would come under house property loss. You can also choose inherited properties from parents and grandparents as self-occupied or let-out based on their usage.

How to Calculate Loss from House Property

  1. Determine the GAV: For self-occupied residences, the GAV is zero. For rental properties, it is the rent received.
  2. Subtract Property Taxes: Under the IT Act, property taxes are deductible from the GAV.
  3. Compute the Net Annual Value (NAV): NAV = GAV – Property tax.
  4. Apply Standard Deductions: Reduce 30% of NAV under standard deductions u/s 24.
  5. Subtract Home Loan Interest: Deduct the interest paid on the home loan during the year.
  6. Calculate Income or Loss: The resulting value is your income or loss from house property, taxable at the applicable slab rate.

How to Treat Loss from House Property for Taxation

If you have a loss from your house property but make money in any of the other five types of income (salary, house property, business or profession, capital gains, other sources), you can use it for house property loss set-off. The Finance Act 2017 introduced an amendment limiting the loss from house property that can be set off against other income heads to Rs 2 lakhs per financial year. The remaining loss can be carried forward to the next fiscal year.

However, if you carry forward the loss, you can only set it off against income from house property in the subsequent year. The balance loss can be carried forward for up to eight years.

Deductions on Home Loans

Interest Deduction

If you live in your house, you can claim up to Rs 2 lakhs in tax benefits on your home loan interest. If the house is empty, you can reap the same benefits. If you rent the property out, you can deduct all of your loan interest. Under certain conditions, the limit for interest deduction is up to Rs 30,000.

Principal Repayment

You can deduct up to Rs 1,50,000 from the overall limit of Section 80C. This is only available if you have received a home loan to purchase or construct a new house property. You cannot resell the property within five years of taking possession, or the deduction will be added back to your income.

Stamp duty and registration charges are just two of the many fees you can claim as a deduction under Section 80C. Other allowable expenses include interest on loans or mortgages, transfer taxes, and commission fees. The total amount cannot exceed Rs 1.5 lakh.

Deductions under Section 80EE and 80EEA

Section 80EE

Under Section 80EE, homeowners with one property on the sanctioned date of their loan can get up to Rs 50,000 in deductions.

Section 80EEA

For those with more than one property, Section 80EEA allows deductions for interest on the loan. The loan must have been availed between 1st April 2019 and 31st March 2020. However, you cannot combine these benefits with deductions under 80EE.

Tax Deductions for Homebuyers: Things to Remember

Interest Deduction During Construction

Interest on a home loan cannot be claimed as a deduction while the property is still under construction. The interest paid during this time can be claimed as a tax deduction, but it must be spread out in five equal installments starting from the year the construction is completed.

Deductions for Self-Occupied Property

If the property is self-occupied, each co-owner who is also a co-applicant on the loan can claim a maximum deduction of Rs 2,00,000 on their Income Tax Return for the interest paid on the home loan. The total interest paid is allocated among the co-owners based on their ownership share.

Time Limit for Interest Deduction

If the construction of the property is not completed within five years, the deduction for home loan interest is capped at Rs 30,000. The five-year period is counted from the end of the financial year in which the loan was taken.

Conclusion

Understanding the concept of loss from house property is crucial for homeowners, especially those who have taken home loans. The Indian Income Tax Act provides various provisions and deductions related to house property, allowing taxpayers to offset losses against other income sources, carry forward losses for future years, and claim tax benefits on home loan interest. By carefully navigating these rules, homeowners can optimize their tax liability and make informed financial decisions. Whether dealing with self-occupied or let-out properties, being aware of the tax implications can significantly impact one’s overall financial health.

Got any questions or point of view on our article? We would love to hear from you. Write to our Editor-in-Chief Rajat Piplewar at rajat@bhume.in.

FAQ