Income from House Property: A Taxpayer's Guide
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Income from House Property

Income from House Property: A Taxpayer’s Guide

10 May, 2024        413 views

In India, if you own a property that is rented or generates any income, you have to pay taxes on its income. The income generated from this source falls under Income from House Property” as stated in the Income Tax Act 1961.

This blog post aims to clarify the concept of income from house property in India. We’ll explain the key aspects, including what’s taxable, how it’s calculated, and a few conditions of its tax exclusion.

Before diving into how it is calculated, let’s explore what house property income means, both for the government and as a taxpayer.

What is Income from House Property?

Any income generated or received from owning or renting a residential or commercial property is referred to as income from house property. This income can be in the form of rent received from tenants or, in the case of self-occupied properties, a deemed rental income.

Still confused with the term rent received or deemed rental income. Don’t worry, we have explained below:
Rent Received: This is the first scenario created when you rent your property to anyone or give it to them on a lease that generates a fixed income for you.

Deemed Rental Income: In the second case of house property income, deemed rental income plays a role. It means that when you choose to use your property itself, the tax law assumes you could have earned rent from it. In this case, a notional rent, called deemed rental income, is created for tax purposes.

What is Taxable as Income from House Property? Annual Value of Property

The actual tax an individual must pay from generated income from house property is not the actual rent received. The tax is calculated based on the “annual value” of the property. It’s an estimated value that a property can generate in the market in a year.

The following are the different points considered when determining the annual value:

  • Location: Properties that are situated in prime locations potentially create higher rents, leading to a higher annual value.
  • Size and Amenities: Depending on the property size and the amenities it offers, decide the annual value.
  • Age and Condition: Those very old properties that need renovation might have a lower annual value.q
  • Municipal Taxes: Local body taxes paid by the owner are sometimes added to the annual value.

The income tax regime under Sections 22 to 27 explains the taxation of Income from House Property. Let’s explore what each section describes:

  • Section 22: What is Taxable under Income from House Property (Annual Value of Property Explained)
  • Section 23: How to find and calculate Annual Value
  • Section 24: Conditions under which tax deductions are considered for Income from House Property
  • Section 25: What can’t be deducted from rent received from tenants?
  • Section 25AA: Rent you expected but didn’t get, then got after April 1, 2001
  • Section 25B: Dues of rent received
  • Section 26: Describes about the property owned by co-owners
  • Section 27: Explain, conditions when you’re taxed like the owner, even if you’re not on paper

I hope, now, your basic concept on house property income is now clear. Whether you own property for self-use or commercial purposes, you must pay the tax on these properties.

In the next part, analyze how the annual value of a property is calculated for paying taxes.

Methods for Determining The Annual Value

There are different methods used to determine the annual value of any property

  • Municipal Valuation: In some areas, municipalities and the local government body determine the annual value of properties.
  • Standard Rent: If a municipal corporation is not present, in such case, the annual value of a property is calculated as a specific percentage (usually between 5% and 10%) of the market value of the property.
  • Fair Market Rent: If both of the above-mentioned cases are not applicable, then the annual value is calculated based on the rent of similar properties in the locality.

What makes rent taxable in India?

Here we have mentioned the conditions when you are supposed to pay taxes on income from house property:

  • Ownership: At the start of the financial year, you must own the property.
  • Possession: You or to whom you have given your property on the lease must own it for at least some part of the financial year.
  • Genuine Transaction: The rental income you generate must be derived from a genuine lease agreement.

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Calculating Income from House Property

If you have read the previous section of the article, hopefully, you have an idea about the annual value of a property. Based on the annual value, income from house property is calculated. Let’s check out how income from house property is calculated for paying taxes.

Income from House Property = (Annual Value x Period of Ownership in the Financial Year) – Municipal Taxes Paid

Example:

Let us consider that we owned the property for the entire financial year (12 months). In this tenure, you have paid Rs. 50,000 in municipal taxes for the year.

Now apply the formula mentioned above for calculating house property income.

Annual Value – 6,00,000
Period of Ownership in the Financial Year – 12/12
Municipal Taxes Paid – 50,000

Income from House Property = (Rs. 6,00,000 x 12/12) – Rs. 50,000 = Rs. 6,00,000 – Rs. 50,000 = Rs. 5,50,000
Therefore, your income from house property for the year would be Rs. 5,50,000.

Exclusions to Income from House Property

There are a few conditions when your income from house property is waved off and you can claim it as well:

  • Municipal Taxes Paid: If you have paid taxes to the municipality, then you can claim it while paying taxes from house property income. The municipal taxes will be excluded from the final value.
  • Interest on Home Loan: If you have availed a home loan to purchase or construct the property, the interest paid on the loan up to a certain limit (Rs. 2 lakhs for self-occupied properties and no limit for let-out properties) can be claimed as a deduction.
  • Depreciation: Once your property is getting older, there is the added advantage that you can claim depreciation on the building component of the property. Usually at a specific rate of 2.5% per year.

Conclusion

If you have a proper idea about the income from house property in India, it will help you to pay taxes on time and stay compliant with tax laws. It is important for every taxpayer who owns a property.

To know how to calculate the annual value, determine your income, and claim applicable deductions. All this information allows you to accurately report your income and potentially reduce your tax liability.

ICA Edu Skills Team
Disclaimer: The content posted in this weblog is intended for general information purposes only and does not include any professional accounting, tax, legal or financial advice. We strive to provide accurate and up-to-date information based on laws, regulations, and best practices which may vary by jurisdiction, industry, and individual circumstances.

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