If you own a house and rent it out, you will need to figure out how much money you are making from it. This is important because you need to report this income for taxes.
Calculating income from house property is not just about adding up the rent you receive; you also need to consider things like property maintenance costs, taxes, and other expenses. By understanding how to do this calculation, you can make sure you are handling your finances correctly and keeping more of your hard-earned money.
What’s Income From House Property?
Income from house property is money you make from owning and renting out a property. This can include homes, offices, or even land you rent.
The Indian laws call this “Income from House Property”. It’s important to understand this because you need to report it for taxes.
Tax Implications for Different Types of House Properties
Understanding how different types of house properties affect your taxes can be tricky. Let’s break it down simply.
Self-Occupied House Property:
A self-occupied house property is a home you live in. This could be where you, your spouse, children, or parents live. If you own a house but don’t rent it out, it is considered self-occupied.
Before the FY 2019-20, the scenario was different. If you owned more than one house, you could only call one of them self-occupied. The rest were treated as rented out by tax rules. You could pick which one to claim as self-occupied.
However, from FY 2019-2020 onwards, the rules have changed. Now, you can claim up to two houses as self-occupied. Any extra houses will be treated as rented out for tax purposes, even if they are empty. This rule gives you a little more benefit if you own more than one house.
Let Out House Property:
A let-out house property is one that you rent out, either fully or partly. If you rent out your house, the rent you receive is considered income.
If you have more than two self-occupied properties, the extra ones are treated as let-out properties. Even if these extra properties are not rented out, they are still considered let-out for tax calculations.
Also note that the inherited property (which you get from your family) can be either self-occupied or let-out, depending on how you use it. If you have vacant land, the income from renting it out is taxed differently. It falls under “Income from Other Sources” or “Profits or Gains from Business or Profession”.
What are the Steps to Calculate Income from House Property?
Calculating income from a house property might seem complicated. Follow these steps to figure out how much income you need to report and pay tax on.
Determine Gross Annual Value (GAV):
Gross Annual Value (GAV) is the total amount your property can earn in a year.
Self-Occupied Property:
For a house you live in, GAV is zero. This is because you do not earn rental income from it.
Let-Out Property:
If you rent out your property, GAV is the rent you receive. This is simple—just use the total rent amount you get from tenants.
Deemed Let-Out Property:
If a property is considered let-out even if it’s not actually rented, GAV is based on the market rent. This means the rent you would get if you did rent it out.
Deduct Property Tax:
Next, you need to account for property tax. It’s important to note that you should only deduct the property tax you paid in the previous financial year. You can subtract the property tax from the GAV to get a new number called Net Annual Value (NAV).
Determine Net Annual Value (NAV):
Now, calculate your Net Annual Value.
Net Annual Value (NAV) = Gross Annual Value (GAV) – Property Tax
Reduce 30% of NAV Towards Standard Deduction:
Under tax rules, you can claim 30% of your NAV as a deduction. This means you don’t need to provide proof of actual expenses for maintenance and repairs.
This 30% is a fixed deduction. You cannot claim additional amounts for expenses like painting or repairs beyond this 30%.
Reduce Home Loan Interest:
If you have a home loan, you can also get a deduction for the interest you pay. If you borrowed money to buy or build the property, you can deduct the interest you pay on this loan. If your property is still under construction, you can only claim this interest deduction after the construction is complete.
Determine Income from House Property:
Finally, calculate your income from house property. Subtract the 30% standard deduction and any home loan interest from your NAV. The remaining amount is your taxable income from the house property. This income is taxed according to the income tax slab that applies to you.
Sample House Property Income Calculation
Let’s go through an example to see how to calculate income from a house property step by step.
Property Details:
Here are the details of our example property:
- Gross Annual Value: ₹5,00,000
- Municipal Taxes Paid: ₹20,000
- Interest on Loan: ₹1,00,000
Calculating Net Annual Value:
Start by finding the Net Annual Value (NAV).
Net Annual Value (NAV) = Gross Annual Value (GAV) – Municipal Taxes
NAV = ₹5,00,000 – ₹20,000
NAV = ₹4,80,000
Deducting 30% of NAV as a Standard Deduction
30% of NAV: 30% of ₹4,80,000
= 0.30 × ₹4,80,000
= ₹1,44,000
Deducting Home Loan Interest
Also, the interest on the loan used for the property must be deducted.
Interest on Loan: ₹1,00,000
Calculating Income from House Property
- NAV = ₹4,80,000
- Less: 30% Deduction = ₹1,44,000
- Remaining Amount: ₹4,80,000 – ₹1,44,000 = ₹3,36,000
- Less: Home Loan Interest = ₹1,00,000
- Income from House Property = ₹3,36,000 – ₹1,00,000 = ₹2,36,000
So, the final income from the house property is ₹2,36,000.
Exemptions and Deductions to Income from House Property
When you own a house and have a loan on it, there are ways to reduce your tax bill. Here’s how you can do it.
- Home Loan Interest Tax Deduction
Section 24 of the Income Tax Act helps you save on taxes if you have a home loan. This section allows you to deduct the interest you pay on your loan from your taxable income.
For a self-occupied property, you can claim a deduction of up to ₹2 lakhs per year.
The interest is divided into two periods: pre-construction and post-construction. The pre-construction period is the time before the house is completed, while the post-construction period is after the house is finished and you begin living in it.
- Tax Deduction for Principal Repayment
Section 80C offers another way to lower your taxes by allowing you to claim a deduction for the principal repayment on your home loan.
This means you can deduct the amount of the loan principal you pay back each year, up to a maximum of ₹1,50,000. Unlike Section 24, which covers interest payments, Section 80C is specifically for the principal amount of your loan repayment.
- Additional Tax Benefit under Section 80EEA
Section 80EEA offers additional tax benefits for homebuyers. If you’re buying a home worth up to ₹45 lakhs, you can claim a deduction of up to ₹1.5 lakhs on the interest paid on your home loan. This benefit is extra and can be used alongside the deductions available under Section 24.
How Can You Save Tax on Income from House Property?
Saving tax on income from house property can be a bit tricky, but with some smart strategies, you can lower the amount you pay. Here are five simple ways to do this:
Joint Ownership:
When you own a house with another person (like a spouse or sibling), you can share the income and expenses of the property. For tax purposes, both owners can claim deductions on their income.
This means if you own a house jointly, both you and the other owner can each get a deduction on the rental income. Just make sure the ownership is officially recorded as a joint.
Joint Home Loan:
If you take a home loan with another person, both of you can claim tax benefits. For example, if you and your spouse take a loan together to buy a house, both of you can claim deductions on the interest paid on the loan.
This can significantly reduce your taxable income. Make sure the loan is in both names and that you both contribute to the repayment.
Register Second Property in Spouse’s Name:
If you own more than one house, it’s smart to register the second house in your spouse’s name.
This way, rental income from that property will be taxed in your spouse’s name, which can sometimes be more tax-efficient. Just be sure to follow all legal requirements for transferring ownership and keep proper records.
Claim Deductions for Home Loan Interest:
If you have a home loan, you can claim deductions on the interest you pay. For a self-occupied property, as already mentioned before, you can claim up to ₹2 lakh per year.
For a rented property, there is no upper limit on the deduction you can claim for the interest paid. Keep all the documents related to the loan and interest payments to support your claim.
Depreciation on Property:
Another way to save tax is by claiming depreciation on your rental property. Depreciation is the reduction in your property value over time because of daily wear and tear.
This can be claimed as an expense, reducing your taxable income from the property. Calculate depreciation accurately and keep detailed records.
Frequently Asked Questions
Listed below are the frequently asked questions related to the Section 80TTB in income tax.
No, you cannot claim a deduction for the principal repayment under the income from the house property.
However, you can get extra tax benefits under Section 80EEA if you buy a home worth up to ₹45 lakhs. This section lets you claim up to ₹1.5 lakhs on the interest paid on your home loan, in addition to the benefits under Section 24.
For tax purposes, each house is treated separately. You must calculate the income and deductions for each property individually.
The general rules are similar, but the specific tax treatment can vary depending on the details of the property and income.
Yes, if multiple people own the property together, each co-owner can claim deductions based on their share of ownership. They should divide the deductions according to their ownership percentage.
Yes, you can get deductions for maintenance and upkeep costs. You can claim a standard deduction of 30% of the annual value of the property to cover these expenses. Additionally, you can claim deductions on the interest paid on a home loan used to buy or build the property.
When a property has multiple co-owners, the income and deductions are split based on each person’s ownership share. Each co-owner reports their portion of the rental income and claims their share of deductions according to their ownership percentage.
Section 22 of the Income Tax Act deals with income from house property.
The ground floor used for business will not be taxed under the “Income from House Property” category. It will be taxed under the “Business and Profession” category. The first floor where you live will be considered a self-occupied property, and there will be no income tax on it.
Since you gave the flat to your wife as a gift, you are considered the “deemed owner” of the flat. This means you, not your wife, must report the rental income from the flat, and it will be taxed as your income.
If the tenant pays the municipal taxes, you don’t need to include these taxes in the rent you report, and you can’t deduct them from your income when filing taxes.
