House Property & Taxes

House is one of the most essential properties that everyone seeks in one’s life. However, big or small, every person wishes to have own home where they can live with peace, love and prosperity with their loved ones. A place that they can call their own and place that gives them maximum happiness and comfort. But, unless one buys one house, rarely one the liabilities associated with it. Houses come with their own taxes and duties that the owner must bear on a yearly basis. With growing number of taxes in almost every consumable item, it has become natural for house owners to look for reliefs in house property taxes, the burden of which is too heavy. Here we will discuss how to save tax on home loan interest and how to claim ownership of your home in your income tax returns.

The Fundamentals of House Property

In India, every building or structure of brick and mortar along with the land attached to such buildings used for residential, official or commercial purpose comes under house property. The income tax department of India does not see these properties as separate, whether you use it for living purpose or for office or for shop. There is no difference between residential and commercial property. All such properties are taxed under ‘income from house property’ in the income tax return files. The owner of these property are the legal owners according to income tax department and not anybody or anyone can exercise the rights of becoming the owner. Also, nobody can take act one behalf of the owner of the property while filing for income tax on house property.

Complete Guide on Income from House Property

However, when a house property is used for commercial or business purpose or carrying out official freelancing work, the tax is deducted under the head of ‘income from business and profession’. Furthermore, whatever expensed are incurred for repair and maintenance are legalized as business spending.

What are the types of House Property According to the Income Tax Department of India?

  1. House Property that is Self-Occupied

    This is a property that is occupied by the owner and its family (parents, spouse, children) for residential purpose. It does not matter whether the owner himself/herself lives there or not. Even if his/her family lives in that property it is counted as self-occupied unless there is any legal dispute between them. This is solely for residential purpose.

    Also, a house that is kept vacant is also considered self-occupied by the income tax department, if not given on rent by the owner.

    If a person owns more than one self-occupied house property, then only one property is considered as self-occupied and rest are treated as let out. Now, the taxpayer as every right to make choice which one he wants to be treated as self-occupied.

  2. House Property that is Let Out or Rented Out

    Any house property that is rented out partially or entirely for a year or part of a year is treated as a let out or rented out house property by the income tax department.

  3. House Property that is Inherited

    A property that is inherited from parents or grandparents or guardians, etc. is an inherited house property. It can be self-occupied or even let out, whatever be the circumstance based on that.

Calculating Income from House Property

Below examples will help you understand how one can compute their income from a house property:

Income of house property Figures in Rs.
Total annual rental income value 15,000 x 12 = 1.8 lakh
Less: Municipal taxes for the financial year – 10,000
Net annual value (NAV) 1.7 lakh
Less: Deductions under Section 24
Standard deduction (30% of NAV) 1.7 lakh – 51,000 = 1.19 lakh
Interest on borrowed capital (if any) 1 lakh
Income from house property 19,000

The above calculation is very simple and shows what aspects one need to consider while calculating income from house property. It is based on the rent out property. Even if you have not rented out your property, you can make calculation follow the market cost of your house if given on rent. It is ideal to give your vacant property on rent if not self-occupied. Anyhow you will have to pay wealth tax on the property which are left vacant unless they are rented out.

Tax Deduction on Home Loans

  • Tax Deduction on Home Loan Interest: Section 24

    In Indian tax system, various deductions and reliefs are given to tax payers who avail home loans. If the owner or family of the owner resides in the house property, then owner of the house property can claim up to Rs. 2 lakhs deduction (Rs. 1.5 lakhs, if one is filing returns for financial year 2013-14) on the ir home loan interest. Same rule applies even if the house is left vacant. If the house property is rented out, then the interest on the home loan is liable to deduction. But deduction on interest is limited to Rs. 30,000 as opposed to Rs. 2 Lakhs if the following clauses proves true:

    • The home loan is availed on or after 1 April 1999
    • The buying or construction of your house property is not finished within 5 years from the end of the financial years in which loan was taken.

    How can one claim Tax Deduction one a house property loan on a property that is under construction?

    No tax deductions can be claimed from a house property, the construction of which is incomplete. One can claim deductions only after the construction is complete. The time duration from when the home loan is availed till the completion of construction is called pre construction period. Whatever interest is paid at this time period can be claimed from the year the construction is complete and that too in 5 equal instalments. Try understanding pre-construction interest from some professional who is qualified in the subject.

  • Tax Deduction on Principal Repayment

    Hindu undivided family (HUFs) and individuals can benefit from the tax deduction claims under Section 80C of the Income Tax Act for principal repayment amount paid for a home loan. One can claim the tax benefits only after the construction of the house property is complete and the taxpayer has received the construction completion certificate. The maximum deduction that ca be availed by the taxpayers under Section 80C, Section 80CC and 80CCD is Rs.1.5 lakhs.

    How you can make claims for this deduction:

    • The home loan that you have availed should be either for construction or purchase of new home property
    • The property for which you wish to make claims must not be sold to anyone in 5 years from the time the possession is taken.
  • Tax Deduction for First-Time Homeowners Under Section 80EE

    The first time home buyers can avail tax benefits on home property loan for both the principal amount and the interest paid. Under section 80C of the Income-tax Act, 1961, principal repayment amount is eligible for tax deduction claims. But, other investments like children’s education fees, public provident fund investments and life insurance premiums, that can fetch deduction claim benefits under the section 80C should not exceed Rs.1.5 lakh. Moreover, first time home buyers can also claim deduction of up to Rs. 2 lakh for interest payment on home loans under section 24(b) of the Act, in addition to principal repayment amount deduction claim.

    Also, being a first-time home buyer, you are also qualified to claim additional tax benefits of up to Rs50,000 per financial year under section 80EE of the Act (check for the conditions required for this claim)

    These benefits are not available for house properties under construction.

Are You Eligible to Claim Deduction on Home Loan?

  • What ownership share you have on a property decides what amount of deduction you can claim.
  • The house property should be in your name for the deduction claims you make to get benefits. Even the co-borrower can avail the benefits of these deduction claims.
  • One can make deduction claims on any property on the financial year when the construction of the property is completed.
  • If you are working with a company then you will have to submit your home loan interest certificate to your employer to claim your tax deduction benefits. Employer can then accordingly make adjustments in tax deductions at source. The certificate will have your name and details on it as a borrower, ownership share and EMI that you pay divided into principal and interest.
  • If you are self-employed then you will have to make self-assessment of your taxes and deductions. You will also have to make calculation of your taxes and claim your refunds (if any) while filing tax returns. It’s also possible that you may have to deposit the dues on your own if there is a tax payable. As a self-employed person you will not require to submit any document anywhere except the income tax department, if they demand so.

How Are Joint Owners Benefitted on Home Loans?

If you are a joint owner and also a co-borrower of a self-occupied home property, then you too can claim deduction up to Rs. 2 lakhs each on home loan interests. Principal repayment deduction includes a registration charges under Section 80C within the limit of 1,5 lakhs and stamp duty for each of the joint owners. Whatever ownership share you have in the property joint owners can claim just in the same ratio for the deductions too.

However, you may not be qualified for the tax benefits if you are not an owner in the property even if you have jointly taken the loan for the property. For example, if property is owned by parents and both parents and children take loan for the property, which is repaid by their child. But if the property is not owned by the child, he/she will not be able to take tax benefits from it even though the child repays the loan. So, here the child who has though jointly taken loan for the property but is not mentioned as co-owner in the certificate then the child will not be qualified for the home loan tax benefits.

So, what you need to do to claim tax benefits on your property? You will not only be required to become a co-borrower but also co-owner too in the property for which you wish to claim tax benefits on home loan.

Every co-owner can then claim up to Rs 1.5 lakhs deduction towards repayment of principal under section 80C, which is within the limit of Rs 1.5 lakhs of Section 80C. Thus, you will be eligible to take larger tax benefit on the interest paid on your home loan,

One point that you need to know is you can claim tax benefits on both the principal repayment and deduction on home loan interest only after the construction of the house property is complete, according to the Section 80C.

Know Whether You Are Eligible for both HRA and Deduction on Home Loan?

There are many cases where people have their own house property, yet for some unavoidable reason are forced to live in rented accommodations. Might be due to their proximity to office or proximity of their kids’ schools or some very personal reason. Let’s understand this with an example.

First Case:
You live in a rented accommodation and your own house is vacant.

You own a house property in Delhi, still you live in a rented accommodation in Faridabad for some personal reason. May be your office is too far from your own house property or may be your kids’ school is very far. In such cases you prefer to move into a rented accommodation to save your time, money and energy on travel. You house is lying vacant as once in a while you visit there and spend time too. You are also paying interest on the loan on your house.

What will you be eligible for?
  • You can claim HRA you pay for your house in Faridabad
  • You can also claim deduction on interest up to Rs 2,00,000 on the home loan you have borrowed.
Second Case:
You live in a rented accommodation, and you have also rented out your own house property.

You live in rented house in Pune due to your job purpose. You have also bought a house in Delhi, which you have rented out. As you have no plans to come back to Delhi in the next few years.

What will you be eligible for?
  • You can claim HRA for the rented accommodation in Pune
  • And also claim the interest you are paying on the home loan for the financial year

Amendment in 2017 Budget Was Significant

A significant amendment was done in 2017 budget when all set of losses were limited to Rs. 2 lakhs. Before the financial years 2017-18, there was no limit set off under the head house property against other heads of income. Though this amendment will not affect the taxpayers with their self-occupied property but it has affected those taxpayers who rent out their properties. However, there is no restriction on the deduction claim of home loan interest amount under Section 24 for a let out house property, but the losses that might emerge on interest repayment account is restricted only to Rs 2 lakhs.

The below table can help you understand the impact of the amendment done in 2017 Budget:

Particulars AY 2017-18 AY 2018-19
Salary income 10,00,000 10,00,000
Income from other sources (Interest income) 4,00,000 4,00,000
Income from house property (*) (4,40,000) (2,00,000)
Gross Total Income 9,60,000 12,00,000
Deductions 2,00,000 2,00,000
Taxable income 7,60,000 10,00,000
Tax on the above 77,000 1,12,500
Additional tax outgo excluding cess in AY 2018-19 on account of the amendment 35,500

Workings for Income from House Property

Particulars AY 2017-18 AY 2018-19
Property A
Annual Value Nil Nil
(-) Interest on housing loan restricted to 2,00,000 2,00,000
Loss from House Property(A) (2,00,000) (2,00,000)
Property B
Net income from House Property after all deductions (B) 60,000 60,000
Property C
Annual Value 5,00,000 5,00,000
Less : Standard Deduction 1,50,000 1,50,000
Less : Interest on loan 6,50,000 6,50,000
Loss from House Property (C) (3,00,000) (3,00,000)
Total income from house property (A+B+C) (4,40,000) Restricted to (2,00,000). Balance loss of Rs 2.4 lakhs can be carried forward for the next 8 AYs

The above discussion might help your claim your tax benefits on home loan interests. Just in case you find all the calculations and evaluations very complicated, you prefer to hire a home loan tax benefits professional who can help you understand the basics and also help you in making the procedures easier for you too. Whether you are a fight time buyer or a second time buyer, it is always better to take advice of qualified professionals who are well updated about the amendments and current rules and policies of the Government. It can help you from major set-backs and losses. Home loan tax procedures are very complicated. If you have slightest of confusion, prefer to hire and take advice from better qualified experts.