Income from House Property: A Taxpayer’s Guide

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: When you rent your property to anyone or give it to someone on a lease that generates recurring or fixed income for you.

Deemed Rental Income: If you own more than two “self-occupied house property”, only two will be considered as self-occupied property and remaining will be treated as “let out property” and notional rent will be calculated as deemed rental income for those remaining self-occupied house property. You can choose “self-occupied house property” as per your choice.

What Are The Income Chargeable Under The Head House Property?  

There are certain items that are chargeable under the head House property. So, let’s explore those facts from your end. Under the Income Tax Act, 1961 in India, income chargeable under the head “Income from House Property” is governed by Section 22 to Section 27. This head covers income derived from a house property, such as a residential or commercial building, including any land attached to it (e.g., garden or parking area).

• Rental Income from Let-Out Property:

 Actual rent received or receivable from a property that is rented out to tenants (residential or commercial).

• Notional Rent from Deemed Let-Out Property:

Definition: If a property is not self-occupied and not rented out (e.g., vacant or used by family members), it is treated as deemed let-out. The notional rent (reasonable rent the property could fetch if rented) is chargeable.  

• Income from Multiple Properties (Beyond Self-Occupied Limit):

Up to two residential properties can be treated as self-occupied, with their GAV considered nil (no income is chargeable, but interest on a home loan can be deducted up to ₹2,00,000 per year under the old tax regime).  

• Composite Rent:

If a property is let out with additional services (e.g., furniture, maintenance, or utilities), the portion of rent attributable to the building is chargeable under “Income from House Property.” The portion for services is taxed under “Income from Other Sources” or “Business Income” if it constitutes a business.

What Incomes Are Not Chargeable Under The Head Income From House Property?

1. Income From Property Used For Own Business or Profession:

• If a property (building or land appurtenant thereto) is used by the taxpayer for their own business or profession, the income derived from such use is taxed under the head “Income from Business or Profession”, not “Income from House Property.”
• Example: If you own a shop and use it for your retail business, any income generated (e.g., business profits) is taxed as business income, not house property income.

2. Income From Vacant Land (Without a Building):

• Income from vacant land (land without any building structure) is not taxable under “Income from House Property” because Section 22 applies only to buildings or land attached to buildings (e.g., a garden or parking area).
• Such income, if any (e.g., rent for using the land), is taxed under “Income from Other Sources.”
• Example: If you lease a vacant plot for ₹50,000 annually, this income is taxed under “Other Sources,” not house property.

3. Income From Subletting:

• If you are not the owner of the property but a tenant who sublets it, the income from subletting is not chargeable under “Income from House Property” (since Section 22 applies only to owners).
• This income is taxed under “Income from Other Sources” or “Income from Business or Profession” if subletting is a business activity.
• Example: You rent a house for ₹20,000 per month and sublet it for ₹25,000. The ₹5,000 profit is taxed under “Other Sources.”

4. Composite Rent For Services Or Amenities:

• If a property is let out with additional services or amenities (e.g., furniture, maintenance, or utilities), the portion of rent attributable to the building is taxed under “Income from House Property.” However, the portion related to services or amenities is taxed under “Income from Other Sources” or “Income from Business or Profession” if it’s a business activity.
• Example: You receive ₹30,000 per month, of which ₹20,000 is for the house and ₹10,000 for furniture. Only ₹20,000 is taxed under house property; the ₹10,000 is taxed under “Other Sources.”

5. Income From Properties Exempt From Tax:

• Certain properties are specifically exempt from tax under the Income Tax Act, and their income is not chargeable under any head, including house property:
  • Property owned by charitable or religious trusts: If used for charitable or religious purposes, as per Section 11.
  • Property held for religious purposes: E.g., temples or mosques, if used for religious activities.
  • Property owned by local authorities or government: E.g., municipal buildings used for public purposes.
  • Farmhouses: Agricultural land with a farmhouse used for agricultural purposes may be exempt if it qualifies under agricultural income provisions.
• Example: Rental income from a property owned by a registered charitable trust used for education is exempt under Section 11.

6. Notional Rent For Self-Occupied Properties (Up to Two):

• For up to two self-occupied residential properties, the Gross Annual Value (GAV) is considered nil, so no income is chargeable under “Income from House Property.”
• However, interest on a home loan (up to ₹2,00,000 per year under the old tax regime) can be claimed as a deduction, potentially resulting in a loss.
• Note: If you own more than two properties, the additional properties are treated as deemed let-out, and their notional rent is chargeable.
• Example: If you live in a house you own, its GAV is ₹0, and no income is taxed under this head.

7. Income From Property Held As Stock-in-Trade:

• If a property is held as stock-in-trade by a real estate developer or trader (e.g., a builder holding flats for sale), any income from such property (e.g., rent received before sale) is taxed under “Income from Business or Profession,” not “Income from House Property.”
• Example: A builder rents out unsold flats in a project. The rental income is taxed as business income.

8. Capital Gains From Sale Of Property:

• Income from the sale of a house property (whether residential or commercial) is taxed under the head “Capital Gains” (Section 45), not “Income from House Property.”
• Example: If you sell a house for a profit of ₹10,00,000, this is taxed as a capital gain (short-term or long-term), not as house property income.

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

Tax on House property income is not calculated on Actual rent received. There are some other aspects which are also considered before arriving at house property income. 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
• 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 but realized in subsequent period.
• 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: This rent is determined under the Rent Control Act. The property owner cannot charge a higher than the standard rent which is fixed under the Rent Control Act.
• Fair Market Rent: It is 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: 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

Steps for Computation of Gross Annual Value of Let out Property:-

Step 1. Compute Expected Rent (ER) :- It is higher of Market Value and Fair Rent, but restricted to Standard Rent.

Step 2. Compute actual rent received (AR) :- It is “Actual Rent Receivable” minus “Unrealised rent”
Step 3. Compare ER and AR received
Step 4. Gross Annual Value :- It is the Higher of ER and AR received.

Computation of Income from House Property

FAQ( Frequently Asked Questions)

1. How Much Income From House Property Is Taxable?

In India, income from house property is taxable under the Income Tax Act, 1961, and the taxability depends on various factors such as the property’s usage, rental income, and applicable deductions. Here’s a concise explanation:   

Self-Occupied Property:

• Up to two properties can be treated as self-occupied, with their GAV considered nil. Interest on a home loan for these properties is deductible up to ₹2,00,000 per year.
• If more than two properties are self-occupied, the additional properties are treated as deemed rented, and their notional rent (based on market value) is taxable.

Rented Property:

• The actual rent or reasonable rent (whichever is higher) is considered for GAV, and deductions for municipal taxes, 30% standard deduction, and full interest on a home loan are allowed.

Vacant Property:

• If the property is vacant, the GAV is based on the reasonable rent it could fetch, and the same deductions apply.

Loss from House Property:

• If deductions exceed the GAV, resulting in a loss, it can be set off against other income (e.g., salary or business income) up to ₹2,00,000 in a financial year. Any excess loss can be carried forward for up to 8 years to set off against future house property income.

2. Do You Need To Declare House Property In ITR?

Yes, you need to declare house property in your Income Tax Return (ITR) in India if you own any property, whether it is self-occupied, rented, or vacant, as per the Income Tax Act, 1961. Below is a concise explanation:

When to Declare House Property in ITR

1. Self-Occupied Property:
   • If you own a house property and use it for your residence, it must be declared in the ITR.
   • Up to two properties can be treated as self-occupied, with their Gross Annual Value (GAV) considered nil. You can claim a deduction on home loan interest (up to ₹2,00,000 per year under the old tax regime).
   • Details of the property and interest paid (if any) must be reported in the ITR.
2. Rented Property:
   • If the property is rented out, you must declare the rental income received, municipal taxes paid, and interest on any home loan in the ITR.
   • The income (after deductions) is taxable under the head “Income from House Property.”
3. Vacant Property:
   • If the property is vacant, it is treated as deemed rented, and you must declare the notional rent (reasonable rent the property could fetch) as the GAV in the ITR.
   • Deductions like municipal taxes, 30% standard deduction, and home loan interest can be claimed.
4. Multiple Properties:
   • If you own more than two properties, only two can be treated as self-occupied. The remaining properties are considered deemed rented, and their notional rent must be declared, even if they are vacant or used by family members.

3. What Is Section 22 Income From House Property? 

Section 22 outlines that the annual value of a property, consisting of any buildings or lands appurtenant thereto (e.g., adjacent land like a garden or parking area), is taxable as “Income from House Property” if:

1. The property is owned by the taxpayer.
2. The property is not used for the taxpayer’s own business or profession (income from such properties falls under “Income from Business or Profession”).
3. The property generates income, either through actual rent (if let out) or notional rent (if deemed let out or vacant).

4. How To Remove Income From House Property From Income Tax?

In India, income from house property is taxable under Section 22 of the Income Tax Act, 1961, but there are ways to reduce or eliminate the taxable income from house property through allowable deductions, exemptions, and strategic tax planning. However, completely “removing” or exempting income from house property from tax may not always be possible unless specific conditions are met. Below is a concise guide on how to minimize or eliminate taxable income from house property:  

Claim Deductions under Section 24:

Two key deductions are available to reduce taxable income from house property:

• Standard Deduction: A flat 30% of the Net Annual Value (NAV) can be claimed for repairs and maintenance, regardless of actual expenses.
  • NAV = Gross Annual Value (GAV) – Municipal Taxes Paid.
• Interest on Home Loan:
  • For self-occupied properties: Deduct up to ₹2,00,000 per year on interest paid on a home loan (under the old tax regime).
  • For rented or deemed let-out properties: The entire interest paid on the home loan is deductible without any upper limit.
• Impact: These deductions can significantly reduce the taxable income or even result in a loss from house property, which can be set off against other income (up to ₹2,00,000 per year) or carried forward for up to 8 years.

Example:

• Rented property: GAV = ₹3,00,000, Municipal Taxes = ₹20,000, Interest = ₹2,50,000.
• NAV = ₹3,00,000 – ₹20,000 = ₹2,80,000.
• Standard Deduction = 30% of ₹2,80,000 = ₹84,000.
• Taxable Income = ₹2,80,000 – (₹84,000 + ₹2,50,000) = -₹54,000 (a loss).
• This loss can offset other income (e.g., salary), reducing your overall tax liability.

Utilize Self-Occupied Property Exemption:

• Up to two house properties can be treated as self-occupied, where the Gross Annual Value (GAV) is considered nil. This means no rental income (actual or notional) is taxable.
• You can still claim a deduction on home loan interest (up to ₹2,00,000 per year) for self-occupied properties, which can create a loss to offset other income.
• Note: If you own more than two properties, the additional properties are treated as deemed let-out, and their notional rent is taxable.

Example:

• Self-occupied property with home loan interest of ₹1,80,000.
• GAV = ₹0 (nil for self-occupied).
• Taxable Income = ₹0 – ₹1,80,000 = -₹1,80,000 (loss).
• This loss can reduce your taxable income from other sources.

Set Off Losses from House Property:

• If deductions (e.g., interest on a home loan) exceed the GAV, you can claim a loss from house property.
• This loss can be:
  • Set off against other income heads (e.g., salary, business income) in the same financial year, up to a maximum of ₹2,00,000.
  • Carried forward for up to 8 years to offset future income from house property.
• This effectively reduces your overall taxable income.

Use Property for Own Business or Profession:

• If the property is used for your own business or profession, its income (or notional value) is not taxed under the head “Income from House Property” (Section 22 does not apply).
• Instead, any income or expenses related to the property are considered under “Income from Business or Profession.”
• Example: If you use a property as your office for a business, its rental value is not taxable under house property, and you may claim business-related expenses.

Co-Ownership to Split Income:

• If the property is co-owned, the income (or loss) from the property is divided among co-owners based on their ownership share.
• Each co-owner declares their share in their ITR, which can reduce the taxable income per person, especially if their individual income falls below the taxable threshold or in a lower tax slab.

5. What Is Section 54F Of the Income Tax Act? 

Section 54F of the Income Tax Act, 1961 in India provides an exemption from capital gains tax for individuals or Hindu Undivided Families (HUFs) who sell a capital asset (other than a residential house property) and invest the proceeds in a residential house property.

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.

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Sanjiv Kumar Giri

Qualification: CA Finalist, B.Com (Hons), AMFI
Profession: Tax Consultant & Financial Planner
Organization: Master Trainer (CA) at “ICA Edu Skills Pvt. Ltd".
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Author of Book: “10+2 Accountancy”

Mr. Sanjiv Kumar Giri is having more than 15 years of experience in the field of Direct Taxes, GST, and Accounts & Finance.

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