Step-by-Step Guide to Calculating Income from House Property

Introduction

Income from house property refers to the rental income earned by an individual from a property they own. It can be calculated by subtracting municipal taxes and standard deductions from the gross annual rent received. Additionally, any interest paid on a home loan can also be deducted from the total income to arrive at the final taxable amount. This income is taxable under the head “Income from House Property” in India. It is important for property owners to accurately calculate this income to ensure compliance with tax laws.

Table of Contents

• What Qualifies as House Property Under Tax Laws?
• Types of Properties Considered for Income from House Property
• Components of Income from House Property
• Determining the Gross Annual Value (GAV) of a Property
• Deductions Allowed Under the Income Tax Act
• Interest on Home Loan: How It Impacts Taxable Income?
• Calculating Net Annual Value (NAV)
• Tax Treatment of Self-Occupied vs Let-Out Properties
• Frequently Asked Questions

What Qualifies as House Property Under Tax Laws?

House property under tax laws includes any building or land appurtenant thereto that is owned by the taxpayer and used for residential or commercial purposes. This can also include any rental income generated from letting out such property to tenants, which is subject to taxation as per the relevant laws. House property can also include any vacant land owned by the taxpayer that is held for the purpose of constructing a house or building. Additionally, any income derived from the sale of house property is also subject to capital gains tax.

Definition of House Property

• Buildings: Includes residential and commercial properties such as houses, flats, offices, warehouses, etc.
• Land Appurtenant: Land adjacent to or attached to the building, like a garden, courtyard, or parking area, is considered part of the house property.
• Ownership: The property must be owned by the taxpayer to qualify as house property under tax laws.

Types of Properties Covered

• Self-Occupied Property (SOP): A property used by the owner for residential purposes.
• Let-Out Property (LOP): A property rented out to tenants.
• Deemed Let-Out Property (DLOP): A property that is not self-occupied or rented but is deemed to be rented out under tax laws.
• Vacant Property: A property that is ready for use but remains vacant.

Exclusions

• Vacant Land: Unattached plots or agricultural land without any building may not qualify unless explicitly covered under certain tax provisions.
• Business Property: Properties used for business or professional purposes are excluded from house property taxation and considered under business income.

Taxable Income from House Property

Income from house property is calculated based on the annual value (the potential rent it could earn) after deducting allowable expenses like:

• Municipal Taxes Paid: Deducted from the gross annual value.
• Standard Deduction: Typically, 30% of the net annual value.
• Interest on Home Loan: Deductible up to certain limits under tax laws.

Types of Properties Considered for Income from House Property

The income from house property under tax laws is assessed for specific types of properties that generate rental income or have a notional rental value. These are categorized based on their usage and ownership status. Some common types of properties considered for income from house property include residential houses, commercial buildings, vacant land with potential for rental income, and inherited properties.

It is important to note that properties used for self-occupation or not let out are also included in the assessment of income from house property. Additionally, properties that are rented out for a part of the year or used for business purposes may also fall under this category. The calculation of income from house property takes into account factors such as municipal valuation, standard deduction, and interest on home loans. Below are the main types:

• Self-Occupied Property (SOP)
• Let-Out Property (LOP)
• Deemed Let-Out Property (DLOP)
• Vacant Property
• Inherited Property
• Commercial Property

Components of Income from House Property

Income from house property is calculated based on specific components outlined in tax laws. These components are used to determine the taxable income under this head. Below are the key components:

Gross Annual Value (GAV)

• The potential income that the property could generate if it were rented out during the entire financial year.
• It is the higher of:
  • Actual Rent Received or Receivable: The actual income from renting the property.
  • Expected Rent: Determined based on fair market rent or municipal valuation, whichever is higher.
• For self-occupied properties, the GAV is treated as zero.

Municipal Taxes Paid

• Taxes paid to the local authority (like property tax or municipal tax) by the owner are deductible from the Gross Annual Value.
• Only taxes actually paid during the year are considered.

Net Annual Value (NAV)

This is calculated as:

NAV=GAV−Municipal Taxes Paid

If the property is self-occupied, the NAV is zero, as the GAV is zero

Standard Deduction

• A flat deduction of 30% of the Net Annual Value is allowed to account for repair, maintenance, and depreciation. For self-occupied properties, since the NAV is zero, the standard deduction is also zero

Interest on Home Loan

• Interest paid on a home loan for the purchase, construction, or renovation of the property can be deducted.
• Limits for deduction:
  • Self-occupied property: Up to ₹2 lakh per year (in India).
  • Let-out property: Entire interest amount is deductible with no upper limit (subject to certain conditions in some jurisdictions).
• Deduction is claimed under Section 24(b) in India.

Taxable Income

The final Income from House Property is calculated as:

Taxable Income=Net Annual Value−Standard Deduction−Interest on Home Loan

Determining the Gross Annual Value (GAV) of a Property

The Gross Annual Value (GAV) of a property is a key component in calculating income from house property under tax laws. It represents the potential income the property could generate in a year and is determined using the following criteria:

Steps to Determine GAV

1. Expected Rent

• This is the higher of:
  • Municipal Valuation: The value assigned by the local municipal authority for property tax purposes.
  • Fair Rent: The rent that similar properties in the same location fetch in the open market.
• However, the expected rent cannot exceed the Standard Rent (if applicable under the Rent Control Act).

Formula for Expected Rent:

Expected Rent= max (Municipal Valuation, Fair Rent)

2. Actual Rent Received or Receivable: The actual rent earned during the year (or receivable, even if not yet received). If the property is vacant for part of the year, only the rent for the occupied period is considered.

3. Vacancy Adjustments: If the property remains vacant for a portion of the year due to genuine reasons, the Actual Rent Received or Receivable may be lower than the Expected Rent. In such cases, the Actual Rent Received is considered as the GAV.

4. Final GAV Determination: The Gross Annual Value is the higher of expected rent, or actual received or receivable, unless the property is vacant, in which case actual rent received is used.

5. Special Scenarios

• Self-Occupied Property: The GAV for a self-occupied property is zero, as it does not generate rental income.
• Deemed Let-Out Property: For properties deemed to be let out, the GAV is based on the Expected Rent.
• Rent in Arrears: If rent is received for prior years during the current financial year, it is taxed separately and does not form part of the current year’s GAV.

Example of GAV Calculation

Property Details:

• Municipal Valuation: ₹2,00,000
• Fair Rent: ₹2,50,000
• Standard Rent: ₹2,40,000
• Actual Rent Received: ₹2,20,000

Calculation:

Expecting Home Rent

Expected Rent = min (max (Municipal Valuation, Fair Rent), Standard Rent)

Expected Rent = min (₹2,50,000, ₹2,40,000) = ₹2,40,000

Compare with Actual Rent Received:

GAV = max (Expected Rent, Actual Rent Received)

GAV = max (₹2,40,000, ₹2,20,000) = ₹2,40,000

Final GAV: ₹2,40,000

Deductions Allowed Under the Income Tax Act

Under the Income Tax Act, several deductions are allowed to reduce the taxable income of an individual or entity. These deductions are provided to encourage savings, investments, and certain types of expenditures. Here’s a comprehensive overview:

1. Deductions Under Section 80C

• Eligible Amount: Maximum deduction of ₹1,50,000 per year.
• Investments and Payments Covered:
  • Life Insurance Premiums.
  • Employee Provident Fund (EPF) and Public Provident Fund (PPF).
  • National Savings Certificates (NSC).
  • Equity-Linked Savings Scheme (ELSS) mutual funds.
  • Tuition fees for children’s education (up to 2 children).
  • Repayment of principal on a home loan.
  • Fixed deposits with a tenure of 5 years or more.

2. Section 80D: Health Insurance Premium

• Eligible Amount:
  • ₹25,000 for self, spouse, and dependent children.
  • Additional ₹25,000 (₹50,000 if parents are senior people) for parents’ health insurance.
  • ₹5,000 for preventive health check-ups (within the limit above).

3. Section 24(b): Deduction on Home Loan Interest

• Eligible Amount:
  • ₹2,00,000 for a self-occupied property.
  • Entire interest amount for a let-out property (subject to conditions).
• Applicable For:
  • Home loans taken for purchase, construction, repair, or renovation

4. Section 80G: Donations to Charitable Organizations

• Eligible Amount:
  • 50% or 100% of the donation amount, depending on the organization.
  • Deduction limit may be restricted to 10% of the gross total income in some cases.

5. Section 10(13A): House Rent Allowance (HRA)

• Eligible Amount: Deduction on rent paid, subject to limits based on salary, rent paid, and HRA received.
• Conditions: Applicable only to salaried individuals receiving HRA as part of their salary.

6. Section 80EE/80EEA: First-Time Home Buyers

• 80EEA: Additional deduction of up to ₹1,50,000 for affordable housing loans.
• 80EE: Deduction of up to ₹50,000 on home loan interest for first-time homebuyers (specific conditions apply).

7. Section 80CGB: Rajiv Gandhi Equity Savings Scheme (RGESS)

• Eligible Amount: 50% of the invested amount, up to ₹25,000.
• Condition: Available to first-time equity investors (subject to scheme conditions).

Interest on Home Loan: How It Impacts Taxable Income?

Interest paid on a home loan significantly impacts taxable income by reducing it, as allowed under various provisions of the Income Tax Act. The treatment of interest on a home loan depends on the type of property (self-occupied or let-out) and the purpose of the loan (purchase, construction, repair, or renovation).

For self-occupied properties, the maximum deduction allowed is Rs. 2 lakh per year under Section 24(b) of the Income Tax Act. However, for let-out properties, there is no limit on the deduction for interest paid on a home loan. Additionally, interest paid on a home loan for a property under construction can be claimed as a deduction in five equal installments starting from the year in which construction is completed. It is important to keep proper documentation of the interest paid on the home loan to avail of these deductions while filing taxes.

Calculating Net Annual Value (NAV)

The Net Annual Value (NAV) is a critical component in calculating Income from House Property under tax laws. NAV is derived from the Gross Annual Value (GAV) after deducting allowable municipal taxes.

Steps to Calculate NAV

1. Determine Gross Annual Value (GAV):
   • GAV is the higher of:
     • Actual Rent Received or Receivable: Rent earned during the financial year.
     • Expected Rent: Higher of municipal valuation or fair rent, capped by standard rent (if applicable).
   Special Case for Self-Occupied Properties:
   • For self-occupied properties, the GAV is zero.

2. Deduct Municipal Taxes Paid:

• Municipal taxes include property tax or other levies paid to the local authority by the owner.
• Municipal taxes are deductible only if:
  • They are paid during the financial year.
  • They are paid by the owner (not reimbursed by tenants).

Formula for NAV

Net Annual Value (NAV)=Gross Annual Value (GAV)−Municipal Taxes Paid

Examples

Example 1: Let-Out Property

Property Details:

• Actual Rent Received: ₹3,00,000
• Expected Rent: ₹2,80,000
• Municipal Taxes Paid: ₹20,000

Calculation:

1. GAV:
   • Higher of Actual Rent (₹3,00,000) or Expected Rent (₹2,80,000) = ₹3,00,000.
2. NAV:
   • NAV= ₹ 3,00,000− ₹ 20,000= ₹ 2,80,000

Example 2: Self-Occupied Property

Property Details:

• Municipal Taxes Paid: ₹15,000

Calculation:

1. GAV:
   • For self-occupied property, GAV = 0.
2. NAV:
   • NAV = 0 − ₹15,000 = 0

Tax Treatment of Self-Occupied vs Let-Out Properties

The tax treatment of self-occupied and let-out properties under income tax laws differs significantly, particularly in how income, deductions, and exemptions are calculated.

Aspect	Self-Occupied Property	Let-Out Property
Annual Value	Zero	Higher of Actual Rent or Expected Rent
Deductions on Interest	Up to ₹2,00,000 (₹30,000 for repairs/renovation)	No upper limit
Standard Deduction	Not applicable	30% of Net Annual Value
Municipal Taxes	Not applicable	Fully deductible if paid by the owner
Principal Deduction (80C)	Up to ₹1,50,000	Up to ₹1,50,000
Taxable Income	Usually results in a loss (if interest claimed)	Can be positive or result in a loss

Conclusion

Income from house property refers to the rental income earned from letting out a house or property. It can be calculated by subtracting municipal taxes and standard deduction from the gross annual value of the property. This calculation helps determine the taxable income generated from owning a house or property. Understanding income from house property is essential for property owners to accurately calculate their taxable income. By deducting expenses such as municipal taxes and standard deduction, individuals can determine the net income generated from renting out their property. For more information, visit openplot.

Also read GST on Rent: Impact of GST on Commercial Property Rental Income in India The Goods and Services Tax (GST) in India on July 1, 2017, marked a significant shift in the country’s tax structure. Replacing multiple indirect taxes, GST aimed to simplify taxation. Create a uniform tax system across various industries, including the real estate and rental sectors. Impact on Rental Income Under the ‘Income from House Property’ The rental income from a property is considered the primary source of income under the ‘Income from House Property’ category. This income is calculated after deducting municipal taxes and standards. Deduction from the gross annual value of the property. Additionally, any interest paid on a home loan can also be deducted. From the rental income to arrive at the final taxable amount.  Income From House Property: How to Earn Money If you own a house property, you have the potential to generate a steady income stream. Whether you have a spare room, a vacation home, or a rental property, there are many ways to maximize your Earn Money from house property. In this blog post, we’ll explore some strategies for increasing your earnings and making the most of your investment.

Frequently Asked Questions