The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him, the profits of which are chargeable to income-tax, shall be chargeable to Incometax under the head Income from House Property. Income from house property is defined as the income earned from a property by the assessee. House property includes the building itself and any land attached to the building. Property refers to any building (house, office building, warehouse, factory, hall, shop, auditorium, etc.) and/or any land attached to the building (compound, garage, garden, car parking space, playground, gymkhana, etc.). There are many intricacies and types of house property which is calculated in different ways. Taxability may not necessarily be on actual rent or income received. If the property is not let out, the tax will be charged on the potential income the property is capable of yielding.
Calculation of Income from House Property
Before learning how to compute income from house property, it is important to understand the terminology.
- Annual Value: This is the capacity of a property to earn income is its annual value.
- Municipal Value: This is the value of your property as evaluated by municipal authorities on which they charge municipal tax. Municipal authorities have a host of factors that they consider before assigning a municipal value.
- Fair Rental Value: The rent which a similar property with similar features in the same (or similar) area would fetch is the fair rental value.
- Standard Rent: Under the Rent Control Act, a standard rent is fixed and owners cannot receive rent higher than that specified in the Rent Control Act. This Act ensures that owners are paid fair rent, tenants are not exploited and are protected from eviction.
- Actual Rent received/receivable: This is the actual amount received by the owner from the tenant as rent, depending on who pays the water, electricity and other utility bills.
- Gross Annual Value (GAV): This is the highest among:
- Rent received or receivable
- Fair Market Value
- Municipal Valuation
If the Rent Control Act is applicable, the GAV is highest among:
- Standard Rent
- Rent Received
- Net Annual Value (NAV): NAV = GAV – Municipal Taxes Paid
- Deductions: To arrive at the actual taxable income from house property, two deductions are allowed, under Section 24 of the Income Tax Act :
- Statutory Deduction: 30% of the NAV is allowed as a deduction towards repairs, rent collection, etc. irrespective of the actual expenditure incurred. This deduction is not allowed if the Annual Value is nil.
- Interest on borrowed capital: is allowed as a deduction on accrual basis if the money was borrowed to buy/construct the house. Deduction is allowed on whichever is lesser between Rs.1,50,000 or the actual interest amount (in case the construction was completed within 3 years of taking the loan, on or after 1-April-1999.) In other cases, it’s between Rs.30,000, and the actual interest, whichever is less.
- Annual Value: Annual Value = NAV – Deductions.
- Owner/deemed owner: Income from house property is taxable to the owner of the property. The owner is the person who is entitled to receive income from property. This means that income is chargeable to the person who receives financial benefit from the property, even if the property is not registered to him, i.e. deemed owner. A deemed owner is an owner by implication and not necessarily documented registration.
Computation of Income From House Property
Income from house property contains the income generated by the owned property of an individual.
Let’s assume you have a property and are charging Rs. 15,000 per month as rent. Let’s also assume that you have paid Rs. 10,000 in municipal taxes for that year, and have Rs. 50,000 as interest on borrowed capital.
|Income of House Property||Amounts (in Rs.)|
|Total annual rental income value||15,000 x 12 = 1,80,000|
|Less: Municipal Taxes||10,000|
|Net Annual Value (NAV)||1,70,000|
|Deductions under Section 24|
|Standard deduction (30% of NAV)||1,70,000 – 51,000 = 1,19,000|
|Interest on borrowed capital (if applicable)||50,000|
|Income from House Property||69,000|
When is Annual Value “NIL”
The annual value can be considered to be nil if the owner is residing in his property (Self-occupied property or SOP) and does not derive financial benefit from the same. It will be nil if the owner of the property has to move out of the city his property is in to another city for work and resides in a rented property not owned by him.
Example: Mr. Basha, who bought a house in Bangalore has to move into a rented place in Pune for his job. The annual value on Mr. Basha’s Bangalore property will be nil, and he will get a tax deduction for interest paid on borrowed capital.
Save Tax on Income from House Property
- Joint Home Loan – If you jointly own a property with someone and also apply for a joint home loan with your partner, you will both be eligible for tax deductions on interest up to Rs. 1,50,000 each.
- Planning a second home? If you already have one self-occupied property registered to your name and wish to avoid paying taxes on a second home, register the second property on your spouse/relatives name to avoid excess taxation.
- Joint ownership – Taxation on income from house property can be divided between co-owners, and hence lessen the load.
- Ownership of more than one property – If you own multiple properties, only one of these can be registered as your residence and fall under self-occupied property (SOP). It is important to evaluate the tax liability on all your properties and choose the one with the highest tax liability to call home, and let out the remaining. You can also change the SOP every year.
- Empty houses – that you own will still be taxed based on the fair rental value, so it’s advisable to let any and all empty properties out, enabling income and no loss because of taxation.