How to calculate ‘income from house property’ for income tax purposes

If you have a house/flat that is either rented out or kept vacant you need to know about income from house property for tax calculation purposes. This is also important for tax saving if you want to set off the interest you are paying on any home loan taken for the same house against the income from house property.

A person’s gross total income chargeable to tax is a sum of income under various heads such as ‘income from salary’, ‘income from other sources’ etc. One of these heads of income is ‘Income from House Property’.

What is income from house property

Income from House Property covers the rent earned from the House property which is chargeable to tax. Sometimes, the owner may have to pay tax on ‘deemed rent’ in case the property is not let out. The income from house property is added/ included in a person’s (the assessee)’ gross total income only if it satisfies three essential conditions:

1. The assessee is the owner of that property.
2. The property must consist of house, buildings and/or land.
3. The property may be used for any purpose except used by the owner for the purpose of running his business or profession. Here ownership includes freehold, leasehold rights and also includes deemed ownership. Section 27 of the Income Tax Act defines deemed ownership of the house property for the purpose of levying tax as:
1. Transfer of ownership to a spouse or minor child
2. Holder of impartible estate. Impartible estate refers to the property which is not legally divisible such as dividing a single storey house
with say 3 rooms among 7 heirs.
3. Property held by member of a co­operative society
4. Any person who has acquired a property under Power of Attorney transaction.

Deductions from house property before levying of tax

While computing the income earned from letting out the property, one can avail (where eligible) various deductions available under section 24 of the Income Tax Act to arrive at the net taxable income from house property income. These deductions include standard deduction, the deduction of municipal taxes, deduction of Interest paid on home loan which is allowed under this head.

Brokerage or commission paid to acquire an asset is not allowed as a deduction.
Interest paid on a home loan: Any Interest paid/payable on the loan taken for acquiring, constructing, or repairing the property is allowed as a deduction from the income from that house property.
Interest paid /payable in the previous years i.e. prior to the year in which property was acquired or constructed (i.e. interest paid in preconstruction period) will be aggregated and will be allowed as a deduction in five successive financial years starting from the year in which acquisition/construction was completed.

Municipal taxes paid: Any taxes paid to the Government during the financial year (for which the income is being computed) on the property owned, such as house tax, are allowed for deduction from the Gross Annual Value which is calculated on the basis of the total rent receivable/received/deemed rent for the property for that FY.

If the owner does not pay the taxes on a property then he cannot avail the deduction too. Owner can claim deduction even for arrears of house tax in the financial year in which these arrears are actually paid.

Standard deduction: It allows the assessee a deduction of 30% of the ‘Net Annual Value’.
Gross Annual Value and Net Annual Value
Gross Annual Value of a property is the value at which the property might reasonably be expected to be let from year to year. It is more like a notional rent which one could have earned in case property had been let out. Even if the property is not let out, the notional rent or deemed rent receivable is taxable.
The Annual Value is determined after taking 4 factors into consideration. These are: (i) Actual rent received or receivable (ii) Municipal Value (iii) Fair Rent (iv) Standard rent.

Net Annual Value is calculated as gross annual value less municipal taxes paid

Calculation of Income from House Property

The annual value of a house property is determined differently for different categories. House properties are divided into 3 categories for this purpose. These are as follows:

Category A: House Property which is let out throughout the previous year

The Gross annual value of a property which was let out throughout the previous year is taken to be higher of the following:
(a) Expected rent/Deemed Rent which is taken as the higher of the Municipal valuation or Fair Rental Value
(b) The actual rent received (or receivable) by the owner of a property which is partly or fully let out.
This implies that in case the actual rent received is in excess of the expected rent then the actual rent received is taken as the gross annual value. On the other hand, if actual rent received is less than the expected rent then, expected rent is taken as gross annual value.
Expected rent or Deemed Rent is the rent which the owner is expected to receive, calculated on notional basis from the higher of the Municipal value or Fair Rental value subject to maximum of the standard rent, in case property is covered under the Rent Control Act.

Category B: House Property which was partly let out and partly vacant during the year.

In such cases where the house property was partly let out and partly vacant during the year, there are two scenarios, which affect the actual rent received owing to such vacancy.

Scenario 1: When the actual rent received or receivable is more than the expected rent despite the vacancy. In that case, the gross annual value is taken as actual rent received as it is higher than the expected rent. Expected rent is calculated as higher of the municipal valuation or fair rent.
Scenario 2: When the actual rent received or receivable is less than the expected rent due to the vacancy of the property for some time during the year. The gross annual value of the property will be actual rent received or receivable.

Category C: House Property which was let out for part of the year and rest of the year occupied for own residence.

Since the house was let out for a part of the year and was self­ occupied for the rest of the year, the gross annual value is calculated as the rent that could have been received in case property was let out for the whole year. The period of self ­occupation is irrelevant.
The Gross annual value is taken as higher of the
a) Expected rent by letting out the property for the whole year i.e. higher of the municipal valuation or fair rent,
b) Actual rent received or receivable only for the period it was let out.
Points to Remember:
1. The income from house property which is occupied by the owner for the purpose of his own residence or could not be occupied by the
owner for his residential purpose due to his employment at other place is taken as NIL. The assessee, in this case, will not be entitled to
the standard deduction of 30% in this case. However, he is allowed deduction of interest paid on house loan including the accumulated
interest of the pre­construction period.
2. Income from House property is added to the person’s total income only if such house or part of the house is let out for whole or part of
the year, or any other benefit derived from the house by the owner.
3. When the assessee has more than one house then, then he/she can exercise an option to treat anyone of the house to be selfoccupied.
The other house(s) shall be deemed to be let out.
Set­Offs and Carry forwards of the losses from Income from House Property
Section 70 of the Income Tax Act allows a person to set off any losses from the house property from the income of any other house property.
Section 71 of the I­T Act allows setting off the losses from house property from the other heads of the Income but not from the casual income i.e. any income which is not likely to occur again in the year.
The unadjusted losses are allowed to be carried forward for a maximum of 8 years starting from the year subsequent to the year in which loss has occurred. In the subsequent years, the set­off is allowed only from the head ‘Income from House Property’.
Budget 2017 has restricted the set off of losses on the house property. As per the sub­section 3 of section 71, an individual is allowed the maximum set off of Rs. 2 Lakh from the other income heads. This means that earlier individuals who were availing unlimited interest deduction on their 2nd house as a loss will now be able to avail a maximum deduction of Rs. 2 lakh