Understanding Income from House Property in India

A house property is a crucial aspect of real estate in India. Any building or land owned by an individual can be considered a house property and is taxable under the income tax laws in India. Understanding the concept of house properties is pivotal for both homeowners and investors.

Under income tax laws in India, a person’s income is taxed under five heads. These include:

• Income tax on salary
• Tax on income from house property
• Income from capital gains
• Income from other sources
• Income from business and profession

In this guide, we focus on what is a ‘house property’ under India’s income tax laws.

What is ‘House Property’?

According to the Income Tax Act of 1961, a house property can be defined as a building, apartment, or land attached to the building such as a garage or a parking lot. According to the income tax laws in India, a house property can be both residential such as houses and apartments, as well as commercial such as offices and shops.

Under Indian tax laws, both residential and commercial properties are considered under the head “Income from House Property” which includes income generated from renting out residential or commercial buildings.

Note: As per the Indian tax laws, rent generated from letting out vacant land is not considered taxable under the head “Income from house property”.

Types of House Property

For the computation of income under this head, a house property is classified into three categories:

• Self-occupied house property (SOP)
• Let-out house property (LOP)
• Deemed let-out house property (DLOP)

What is Self-Occupied Property?

A self-occupied property is a property occupied by the taxpayer for residential purposes. The owner of such a property does not earn any rental income from this type of property. This excludes a property being used for commercial purposes.

As per the income tax laws, a person can claim a maximum of two houses as self-occupied. Hence, these properties will not be subject to tax on notional rental income. However, this rule applies to each taxpayer separately and not to a family as a unit.

Tax Implications

A self-occupied property is considered to generate zero notional rent. However, the owner of such kind of properties can claim deductions on interest paid as well as on the principal amount.

Deductions Available

• Interest on home loans Up to 2 Lakh under section 24(b)
• Tax deduction on the principal repayment up to Rs 1.5 lakh under section 80C

What is Let-Out Property?

In India’s income tax law, let-out property is a leased or rented property. Let-out properties could be residential, such as apartments or houses, or commercial, such as office or retail space. Before imposing a tax on the income earned by letting out a property, it is balanced against the costs of owning and maintaining the property, such as home loans, property taxes, and repairs.

Tax Implications

The income generated from the rent received from a let-out property is taxable under the head “income from house property”. The gross annual value (GAV) is considered for tax purposes.

GAV of a let-out property is calculated by taking into account the actual rent an owner receives and the rent the owner could reasonably expect (whichever is higher).

Deductions Available

• Standard deduction: 30% of the net annual value.
• Municipal taxes paid by the owner are deducted to derive the Net annual value of the house property
• Interest on home loan: No upper limit for deduction under Section 24(b). The entire interest on the home loan can be claimed as a deduction.

What is Deemed Let-Out Property?

According to the Income Tax Act of 1961 Section 23(1) (A), if a person owns more than two properties, all other properties are considered “deemed to be let-out”. Deemed let-out properties can be either vacant or actually in use by a tenant.

Tax Implications

Income tax is applicable on deemed let-out properties even if it is not rented out. The tax applicable is similar to that of a let-out property. A notional rent (based on the annual value of the property) is applicable in the case of deemed let-out properties.

Deductions

Same as those for a let-out property: Standard deduction, municipal taxes, and interest on home loans.

Inherited Property

Apart from the above-mentioned properties, inherited property is another very common type of property in India. An inherited property is a type of property that is left in one’s will and is owned by the parties whose names are mentioned in the will. An inherited property can be used for both residential purposes or be let out.

Income Tax Implications on Inheritance

The legal heirs are not required to pay any taxes on a property that has been left for them. However, in case such properties are let out, they become a source of income. Hence, the owner(s) must declare the income and pay taxes accordingly.

What is Income from House Property?

Any house property owned by an individual, if derives income is taxable under the head ‘Income from House Property’. The taxable income from a house property can be determined by subtracting a 30% standard deduction and home loan interest from the net annual value (NAV).

Here’s a detailed explanation of how to calculate income from house property.

Find out the Gross Annual Value (GAV) of Your Property

GAV for a self-occupied property is NIL. The GAV for a let-out property is the rent received from that property. In the case of deemed let-out properties, the GAV is rent a property can generate as per market value.

Deduct Property Tax

An owner can claim a deduction on the house tax paid. Deduct the property tax from GAV to get the net annual value (NAV) of your property. Note that the owner can deduct the amount of house tax paid only during the previous year from the GAV.

Determine Net Annual Value (NAV)

NAV = GAV – property tax paid for the previous year

Reduce 30% of NAV

A 30% standard deduction is allowed on NAV under Section 24 of the Income Tax Act.

Reduce Home Loan Interest

Interest paid on home loans is also deducted from the NAV to get the income from house property. The interest paid on a home loan taken for both the purchase or construction of a home can be deducted from NAV. However, in case the loan was taken for construction, you can claim a deduction only after the property has been constructed.

Taxation of Jointly Owned Property

When a property is owned by more than one individual, it is considered a “jointly owned property”. The ownership of such a property will be in the ratio in which they have contributed towards the cost of the property. The share of the cost can be determined by taking into account the ratio of the home loan taken or the down payment. In the event of an inherited property, the ownership ratio is determined based on the share mentioned by the testator in the will.

The tax implications on a jointly owned property depend on whether the property is self-owned or let out. In case the property is self-occupied, no tax is applicable. However, each owner can claim up to Rs 2 lakh deductions on interest paid on home loans proportional to their share of the property.

Taxation of Rent Received for Jointly Owned Property

All properties apart from the one marked for self-occupancy are considered for tax implications. Such properties can either be let out or deemed to be let out. For deemed to be let out properties, notional rent has to be declared based on ownership shares.

For the properties that are actually let out, the rent amount is divided among the owners. Further, the taxable income is derived after the 30% standard deduction from rent received and interest paid on home loans.

BhuMe.in POV

Real estate is something one must thoroughly understand in India to make the right decisions regarding realty investments. These properties are followed by residential, commercial, and property types, each offering unique benefits.

Residential properties offer stability and tax benefits, while commercial units can offer a higher return. Your self-occupied properties can be used for personal use and tax advantages, whilst your rental investments provide you with interest and the ability to claim further income-reducing deductions against your other taxable earnings. Understanding these differences could help you balance your investments and handle money more effectively.

Once you know this, it can help guide your strategy through real estate with more purpose and confidence.