Owning your dream house is not about just a place to call home but it also plays a significant role in your tax planning. Whether you are a homeowner living in your property or earning rental income from letting out your property, the tax implications can be crucial. Understanding the key terms and concepts related to this form of income can help you plan your taxes efficiently and will help you in reducing your tax liability.
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In this blog, we will break down some essential terminologies related to income from house property and help you understand how to plan your taxes better.
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Annual Value
The Annual Value of a property is a crucial factor in determining taxable income from house property. It is basically the amount of rent the property can generate if you rent it out. There are two key elements of annual value:
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Gross Annual Value (GAV):
GAV is higher of the Actual Rent received or the Fair Rent. It is the potential income that a property can generate if rented out during the year. Even if the property is vacant, the expected rent is considered for taxation.
Example 1.: Riya owns a house with an actual rent income of ₹20,000 expected monthly rent of ₹15,000. The GAV for the year would be higher of actual rent or fair rent [₹20,000 x 12 = ₹2,40,000]. Even if the property remains vacant for three months, the GAV will still be calculated based on the full 12 months.
Example 2.: Riya owns a house with an actual rent income of ₹10,000 expected monthly rent of ₹15,000. The GAV for the year would be higher of actual rent or fair rent [₹15,000 x 12 = ₹1,80,000]. Even if the property remains vacant for four months, the GAV will still be calculated based on the full 12 months.
- Net Annual Value (NAV): NAV is derived by deducting municipal taxes paid from the Gross Annual Value (GAV). This is the income on which tax is calculated.
Example: Riya paid ₹20,000 as municipal taxes, then Net Annual Value will be ₹2,20,000 [₹2,40,000-₹20,000].
Note: The annual value is considered zero if the property is self-occupied or unoccupied. This helps homeowners avoid paying taxes on properties through which they are not generating income.
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Municipal Taxes
Municipal taxes are property taxes paid to the local municipal authority for services such as sanitation, water supply, and waste management. These taxes can be deducted from the Gross Annual Value (GAV) to arrive at the Net Annual Value (NAV) of the property. However, this deduction can only be claimed if the municipal taxes are paid by the property owner. If the tenant has made the payment, the owner cannot claim this benefit.
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Self-Occupied Property
A self-occupied property is a house that you or your family uses for residential purposes. If you own multiple properties, you can treat only 2 houses as self-occupied, the others will be treated as let out. No tax is levied on a self-occupied house since there is no rental income.
Note that any two properties, out of all properties you own, can be considered as self-occupied properties. It is not mandatory to treat only the first two houses as self-occupied.Let-Out Property (LOP)
Letting out means renting out assets, such as a residential property, commercial space, or vacant land, to another party for a certain period in exchange for rent. It could be rented for the entire year or part of the year to generate rental income.
Deemed Let-Out Property
A property that remains vacant or used for purposes other than earning rental income is classified as a deemed let-out property.
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Standard Deduction
A fixed deduction of 30% of the Net Annual Value (NAV) is allowed as a standard deduction. The intent behind providing this benefit is to cover repair & maintenance expenses and other property-related expenses. This deduction is allowed regardless of whether these expenses have actually been incurred.
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Interest on Home Loan
Interest paid on repayment of a loan that is borrowed for purchasing, constructing, or renovating a house property can be claimed as a deduction under Section 24(b) of the Income Tax Act. For self-occupied properties, the maximum deduction allowed is ₹2 lakh per annum, whereas there is no upper limit for let-out properties. You can claim the deduction of actual interest amount paid in case of let-out properties.
If a property is partly self-occupied and partly let-out during the year, interest deduction limit of ₹2 lakh on the loan will be applied proportionately based on the self-occupied period. There will be no limit on interest for the period it is let-out.
If the interest on the loan exceeds ₹2 lakhs, the unclaimed portion can be carried forward for up to 8 years and set off against future income from house property.
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Pre-Construction Interest
If you have taken a home loan for constructing a property, the interest paid during the construction period cannot be claimed immediately. However, the interest incurred before the construction is completed, known as pre-construction interest, can be claimed in five equal instalments after the construction is finished. This allows you to gradually offset these interest expenses against your house property income.
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Loss from House Property
Income from house property can sometimes lead to a loss, especially when deductions like home loan interest or standard deduction are more than the rental income. You can set off these losses against income from any other sources, such as salary or business income. The set-off is restricted to ₹2 lakh in a financial year. If the loss in a year is more than ₹2 lakh, you can carry forward the excess loss for up to next 8 years. The loss can be set off only against income from house property in future years.
Conclusion
Understanding the key terminologies related to income from house property is essential for effective tax planning and maximising available deductions. By applying these rules correctly, property ownership can become both a lifestyle choice and a strategic financial decision.
Consulting a qualified financial advisor can further simplify complex tax terms and guide you in making informed choices. To optimise your taxes, download the 1 Finance app and book a consultation with a qualified financial advisor for a seamless, hassle-free tax planning experience.
