Understanding the income from house property is vital to all property holders. According to the Income Tax Act, it is the revenue earned from buildings or land annexed to buildings owned by a taxpayer. Notably, even though the property itself may not be rented out, it might be treated as 'deemed to be let out', and income calculated accordingly.
What is Income from House Property?
The phrase "income from house property" encompasses both real rental income and notional income from houses that are not self-occupied. The Income Tax Act provides for such income to be calculated under a distinct head, irrespective of the nature—residential or commercial. However, vacant land without any buildings does not fall within this head unless appurtenant to a building.
Types of Properties Covered
- Self-occupied residential property
- Rented house or commercial property
- Considered a let-out property (if you have more than two houses and the others are unoccupied)
The computation of income from house property will be crucial for tax filing, particularly for those with multiple assets or those who receive rental income.
Important Terms to Calculate House Property
Before learning how to compute income from house property, it's important to learn the following terms:
- Gross Annual Value (GAV): The greater of municipal or fair rent or actual rent received.
- Fair Rent: Rent determined in the market for similar houses in the same area.
- Standard Rent: Highest rent under Rent Control Acts, if any.
- Net Annual Value (NAV): GAV minus municipal taxes paid by the owner.
- Actual Rent Received: Rent received from the tenant.
Also Read: Home Loan Tax Benefits Made Simple
How to Calculate Gross Annual Value (GAV)
To arrive at the house's property value, you first have to calculate the Gross Annual Value:
- Compare Municipal Value and Fair Rent. Take the higher of the two
- Compare this figure with Standard Rent, where the Rent Control Act is in force. The lower of the two becomes the anticipated rent.
- Compare the expected rent with the rent received. The higher of the two becomes the GAV.
For instance, if Fair Rent is ₹20,000/month and Municipal Value is ₹18,000/month, then the expected rent is ₹20,000. If Standard Rent is ₹19,000, then the expected rent will be capped at ₹19,000. If the actual rent is ₹21,000, then GAV will be ₹21,000 x 12 = ₹2,52,000.
How to Calculate Net Annual Value (NAV)
After the GAV is determined, deduct the municipal taxes paid in the year (by the owner and not the tenant) to get NAV:
NAV = GAV - Municipal Taxes Paid
Example:Suppose the Gross Annual Value (GAV) of a rented property is ₹3,00,000. The municipal taxes paid by the owner during the year amount to ₹30,000.
Then,
NAV = ₹3,00,000 - ₹30,000 = ₹2,70,000This ₹2,70,000 will be used to compute further deductions under Section 24, such as standard deduction and interest on home loan.
Income from House Property Calculation - Deductions Under Section 24
From NAV, the following deductions under Section 24 are made:
- Standard Deduction: 30% of NAV (for repairs and maintenance).
- Interest onHome Loan.
- Up to ₹2 lakh annually for self-occupied house property.
- The entire interest paid on a home loan is deductible if the house property is let out (rented).
All such deductions have a major impact on the calculation of income from house property and assist in tax savings.
Self-Occupied Property and Taxability
If the house property is self-occupied:
- GAV is considered NIL
- Interest on home loan (up to ₹2 lakh per year) alone can be claimed as a deduction
- No consideration of rental income is made, but interest paid on the loan may be claimed.
Planning for home loans becomes essential for salaried taxpayers and house owners. Satisfying the eligibility criteria for home loan and optimizing loans may minimize tax outgo.
Deemed Ownership Cases
The individual can still be taxed under this head if he/she happen to be a deemed owner. This occurs in cases such as:
- Possession under the power of attorney or part performance under Section 53A of the Transfer of Property Act.
- Keeping properties on behalf of minors or spouses.
Knowing such cases assists in addressing income from house property problems and solutions effectively.
Loss from House Property
When deductions (most importantly, home loan interest) exceed the NAV or deemed income:
- There is a loss from house property.
- This loss can be offset against income under other heads, such as salary or business income.
- Not adjusted completely, it can be carried forward for a maximum of eight assessment years.
Effective house property calculation can therefore assist you in controlling your tax outgo.
Also Read: How important is CIBIL score in getting a Home Loan?
Perequisites for Improved Tax Planning
Here's how you can maximize your house property income:
- Joint Home Loans: Claim the deduction against both owners under Section 24 and Section 80C.
- Let Out Vacant Properties: Avoid keeping your property unoccupied. By renting it out, you not only generate regular income but also become eligible for higher tax deductions on home loan interest, compared to a self-occupied property.
- Distribute Ownership: Sharing property ownership with spouse or parents enables halving the income and minimizing personal tax liability.
- Manage Your Home Loan Wisely: Select appropriate tenures, interest rates, and EMI plans suitable for your cash flows and tax-saving options.
The process of this planning can become easier through the use of an income from house property calculator.
Conclusion
Correct calculation of income from house property is crucial not only for tax compliance but also for making the right money decisions. Whether you are handling self-occupied or rental properties, knowing how to calculate income from house property makes sure that you utilize all the possible deductions and tax benefits. Grihum Housing Finance urges every homeowner to avail of tools such as an income from house property calculator and consult specialists for tax-effective property investment. Plan, obey willingly, and make your real estate serve your financial welfare.
