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Principles Of Income And The Understanding Of Income Under The Head Of Income From House Property

Many of us dream of building our own house. But unfortunately, the property prices are so high that few people can afford to own a home without having to take out a loan. There are several banks and financial institutions that offer home loans to their clients at easy EMIs. Moreover, the Indian Government too gives plenty of incentives regarding this. In particular, the government provides tax deductions on income from home property. These deductions are discussed in Section 24 of the Income Tax Act, 1961 (ITA/Act).

The income from a property consisting of buildings or land attached to them falls under the heading of 'house property'. According to this heading, house properties fall into three categories, i.e., let-out house property, self-occupied house property, and deemed let-out house property.

In calculating the income from a house, its annual value is taken into account. In determining annual value, several factors, such as municipal valuation, fair rent, standard rent, and actual rent, must be considered. The value of a property is calculated on a notional basis, even if it is not really rented during the year, and hence taxed accordingly. For properties that are self-occupied or cannot be occupied by the owner because of his employment, business or profession at another location, the value of one or two such properties is defined as "nil".

This article, therefore, revolves around Section 24 of ITA and the deductions under it.

Income from house property in India

'Income from house property' means any income derived from house property, whether it be in the form of rental income or upon its transfer. Thus, houses, buildings, offices, and warehouses are all considered to be 'house property' under the ITA. A house property income is one of five sources of gross total income (GTI) that is included in the computation of the assessee's GTI for the year. Several deductions must be taken into account before the income from house property is taxable.

The following three conditions must be met in order for the income to be taxed under Income from House Property:
  • In order to be considered a house, its property must be a building, land, or an apartment,
  • The property owner should be the assessee, and
  • Furthermore, the property should not be used for business purposes.
A property can be self-occupied, let out, or inherited. Under income tax rules, the income taxable under the heading 'Income from House Property' is calculated in a specific manner for both self-occupied properties and let-out properties. The term self-occupied refers to a house that is being occupied by the assessee for residential purposes and which may also be occupied by family members.

Accordingly, a vacant house is also regarded as a self-occupied dwelling for income tax purposes. There are, however, some exceptions. In some cases, the assessee may not be able to occupy the property due to employment issues, and he or she may not derive any other benefits from it. Two or more houses can be treated as self-occupied, while any house other than those two is considered a rental property.

Calculation of income from self-occupied house property

The income deductible under 'Income from house property' is calculated as follows when considering self-occupied property:
  • Self-occupied properties are considered to have a Nil Gross Annual Value, from which the municipal taxes paid during the year are subtracted to arrive at the Net Annual Value (NAV) of the property.
  • The above-mentioned NAV is further deducted by two deductions under Section 24(a) Standard Deduction of 30 percent of NAV can be claimed under Section 24 (a), while the deduction for interest paid on borrowed capital (home loan) can be claimed under Section 24(b).
  • Section 24 deductions allow the resultant income to be taxed after deductions.
As the Gross Annual Value of a self-occupied property is Nil, one is always left with either Nil or a negative number (if one takes out a mortgage), which can be added to other sources of income.

Calculating rental income from a rental property
If the assessee rents out a house property even for a few months, the property is considered to be a rental house property, and the income tax is calculated accordingly.

The following steps will help you determine the income from a rental property:
  • Gross Annual Value (GAV) of the property: To begin, determine the amount of rent received each year.
  • Reduce property tax: Property tax is deducted from the GAV of a property when it has been paid.
  • Arriving at NAV: Deduct the Municipal Taxes paid during the year in order to arrive at the Net Annual Value (NAV).
  • Reduce 30% of NAV: Section 24 of the ITA allows a deduction of 30% on NAV. Subtract the Standard Deduction, 30 percent of the Net Annual Value, and any interest on the mortgage, if any, to get the final income from the let-out property.
  • Reducing home loan interest: In addition, the interest paid during the year on a housing loan qualifies for a deduction under Section 24.
  • Loss from house property: The deduction for home loan interest is not available when a self-occupied house is owned, since its GAV is zero. It can be offset against income from other heads.
The steps outlined above make it easy to calculate rent for self-occupied houses as well as rented houses.

What is Section 24 of the Income Tax Act, 1961

Under Section 24 of the ITA, there are two deductions from annual value, i.e.,
  • 30% of NAV; and
  • Interest on borrowed capital.

Section 24(a) of the Income Tax Act, 1961
30% of NAV is allowed as a deduction under Section 24a of the ITA. This is a flat deduction and is allowed irrespective of the actual expenditure incurred. Due to the fact that the annual value itself is nil, the assessee will not be eligible for a deduction of 30%, in the following cases:
  • In case of self-occupied property; or
  • When the property is held as stock-in-trade and is not let for the whole year or for any part of the year prior, the certificate of completion of construction of the property may be obtained up to 2 years after the end of the financial year the certificate was obtained from the competent authority.

Section 24(b) of Income Tax Act, 1961
Interest on borrowed capital is allowed as a deduction under Section 24b. Deductions can be claimed for interest paid on loans taken out for acquisition, construction

Difference between Section 24b and Section 80C

Section 24b allows interest on home loans while Section 80C allows principal on home loans. Listed below are comparisons between Sections 24 and 80C:

Tax deductions:
Under Section 24b, tax Deduction is allowed only for interest, while under Section 80C the tax Deduction is allowed only for the principal.

Basis of tax deductions:
The tax deduction under Section 24b is made on the basis of accrual basis, while the tax deduction under Section 80C is made on the basis of cash basis.

Amount of deduction:
Under Section 24b the amount of deduction in the self-occupied property is Rs. 2,00,000, from the assessment year 2015-16, and in cases other than the self-occupied property, there is no limit. On the other hand, under Section 80C, the amount of deduction is Rs. 1,50,000, from the assessment year 2015-16.

Purpose of loan:
The purpose of a loan under Section 24b should be for the purchase or construction or repair or renewal or reconstruction of a residential house property. Under Section 80C, the purpose of a loan should be for the purchase or construction of a new house property.

Eligibility for claiming Tax deduction:
Eligibility for claiming tax deduction under Section 24b is that purchase or construction should be completed within 3 years, and under Section 80C, there is no eligibility.

Restriction on sale of property:
Under Section 24b, there is no restriction on the sale of property, however, there is a restriction under Section 80C. Under Section 80C, the tax deduction claimed would be reversed if the property is sold within 5 years from the end of the financial year in which such property is acquired by him.

Deduction during construction period:
Under Section 24b, the interest paid during the construction or the acquisition period shall be allowed in 5 equal installmentsfrom the last day of the preceding Financial Year in which the construction is completed, and under Section 80C, no deduction is available for the principal repayment during the construction/acquisition period.

Basically, a deduction of 30 percent on a property's net annual value is provided by Section 24. For self-occupied properties, the deduction is 'nil' according to the IT Act, regardless of whether municipal taxes have been paid or not. Thus, if a purchaser purchases a property with his own resources, that is, without obtaining a mortgage, and generates rental income from it, he can claim Rs 30 as a deduction from every Rs 100 earned. In the case of self-occupied properties, however, the owner may not take advantage of Section 24 deductions.

One of the most common long-term investment objectives of Indians is buying a house. EMIs on a home loan consume a considerable amount of one's income. In other words, the government offers a wide range of tax incentives for residential property under Section 24 of the Income Tax Act. Although section 24 is not an independent part of the income tax act, those provisions have been incorporated in all succeeding income tax acts. Renting out your property can earn you money.

Several attractive deductions are available under section 24 of the Income Tax Act when it comes to real estate income. Thus, a rental income will have a lower effective tax rate than an ordinary wage tax. Income from goods is taxed under the Indian Income Tax Act. Whether the property is used for residential use, industrial use, or both, taxes are due. Buildings can be residential, office buildings, shops, factories, halls, etc., as well as land associated with them, i.e., gardens, buildings, playgrounds, and car parks.

According to Section 24, the borrower must pay taxes on rental property income when a borrower owns rental property, which is one of the few sources of income where actual income must be reported. During the lease consideration process, the income that the asset can earn is assessed. Unless one dwelling house is included in the taxable income, all income from private property, leased property, and vacant property (including houses) is taxable as "Income from the Property".

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