No announcement yet.

Income tax on property: A ready reckoner


Income tax on property: A ready reckoner

Last updated: June 25 2018
1 | Posts
1380 | Views
  • Time
  • Show
Clear All
new posts

  • Income tax on property: A ready reckoner

    One of the most appealing reasons to buy property is the tax benefits that can be derived. Investments in property offer triple benefits: capital appreciation, tax exemptions and rental income, if applicable. Additionally, the financial burden that comes with a housing loan is easily offset with the tax benefits, which we'll examine case by case.


    Housing loan is a significant tax saver because both the interest and principal components offer better tax benefits. Under Section 24 of the Income Tax Act, a maximum of Rs 1.5 lakh can be deducted from taxable income. The principal component of the loan availed can be claimed subject to a maximum ceiling of Rs 1 lakh under 80C. To claim these benefits, the property has to be constructed or acquired within three years from the end of the financial year in which the capital is borrowed. Another important point is that home loan interest is deductible on an accrual basis.

    The tax benefits are not only available for home loans from banks and financial institutions but also applicable for loans from other sources like friends and relatives for home renovation, construction etc if you have valid proof. However, the benefit allowed here is only for the interest portion.


    Many people buy more than one property without understanding the tax implications. If you own two properties, one will be deemed to be let out even if actually it is not. Tax is applicable on the notional rental income for the property. For a second home loan, there won't be any tax benefit on the principal repayment of the loan.

    Further, the additional house owned is taken for computation of the total wealth for the purpose of computing wealth tax. A wealth tax of 1 per cent is payable on the amount exceeding Rs 30 lakh.


    In case if the second property is let out, municipal taxes and 30 per cent of the total rental income can be deducted from tax. In addition, a full deduction of interest paid against home loan is also allowed against the rent.

    For example: If X lets out his property and earns Rs 25,000 per month as rental income, his annual rental income would be Rs 3 lakh.

    If the property tax for the year is Rs 10,000, and the maintenance cost Rs 90,000 (30 percent of the rental income) is deducted from the rental income, his taxable income would be Rs 2 lakh only.

    If he is having a home loan of which the annual interest portion comes more than Rs 2 lakh, the entire rental income will become tax free.

    Apart from this, the Direct Taxes Code, which is expected to be implemented in the next financial year, might exclude the principal component.


    For a property under construction that is acquired through a loan, the interest paid on the principal during the construction period can be claimed for tax benefits. The principal portion that gets repaid before completion is excluded for deductions under 80C until the property is acquired.


    If you are planning to buy a land, an important point to keep in mind is that there is no tax benefit associated with land purchase loans, even if it is let out.


    Commercial properties are exempt from wealth tax, and not included in calculating the wealth of a person.

    But it is imperative to note that a commercial property is not eligible for deduction under Section 80C.


    When a property is sold for a profit after three years from the date of purchase, it becomes a long term capital gain, and it is taxed at the rate of 20 per cent with indexation benefit.

    This capital gains tax can be avoided if the total proceeds of the sale are completely invested in any residential property or in REC/NHAI bonds. Tax exemption is applicable if the total amount is invested in residential property within two years or in the construction of a residential property within three years.


    If a husband and wife take a joint home loan, both of them can claim tax exemption individually based on their respective shares in the loan. To claim tax benefits, all co-borrowers have to be co-owners.


    Many people have a misconception that house rent allowance (HRA) benefits are applicable along with the income tax deductions.

    If you are living in an 'own' house which is bought with a home loan, you are eligible only for tax deductions under Sections 24 and 80C. But if you have availed a loan to construct a house and live in a rented house, you are not eligible for any tax rebates but for HRA benefits.

    On the other hand, if you have rented out your house and live in a rented house, you are eligible for both income tax benefits and HRA benefits but the rental income will be added to your taxable income.

    Income tax on property: A ready reckoner - Indian Express
    Please read IREF rules | FAQ's
  • #2


    Re : Income tax on property: A ready reckoner

    How to calculate income from house property for ITR1

    The calculation of income from house property and all tax-related deductions that you are eligible to claim depends on whether the house is self-occupied or let-out.Preeti Motiani | ET Online | June 24, 2018, 22:10 IST
    Apart from providing general information and break-up of salary income in the ITR-1, if an individual has only one house property, then he/she is also required to provide a detailed break-up of income from it.

    Before you start calculating income from house property to be filled in ITR-1, you must ensure that you are eligible to file your return using ITR-1 and have the all the required documents to do the same.

    There are certain things you must know to calculate the income from house property.

    Naveen Wadhwa, DGM, says, "One house property means that there should be only one house property registered under the name of individual whose income is chargeable to tax. Income tax laws define house property as any building and land appurtenant thereto of which an individual is owner."

    The calculation of income from that house property and all tax-related deductions that you are eligible to claim depend on whether the house is self-occupied or let-out. However, one must remember that if the property is used for carrying out any business or profession then provisions of 'Income from house property' will not be applicable.

    In order to claim deductions from income from house property, one is required to calculate annual value of the property.

    How to calculate income from house property
    To start computing income from house property, one first needs to choose the type of house property in the ITR e-filing form. From the drop down menu, you will have choose between 'Self-occupied' and 'Let-out' property.
    • Self-occupied property
    Wadhwa says, "Following properties shall be deemed as self-occupied property:
    A) A property used by the owner or his family members (i.e., parents, spouse or children) for his/her/their residential purposes, or
    B) If you own a house but it is empty throughout the year because of your employment at any other place, or
    C) If you own a house but live with your parents, in that case, you may treat the said house as your self-occupied property if it is not let out during the year."

    Therefore, according to income tax laws, the annual value in the above mentioned cases will be automatically taken as nil, i.e., zero.

    In the above cases, you can claim deduction only for the interest paid on the borrowed capital, i.e., interest paid by you during the financial year (for which the return is being filed, i.e., 2017-18 in this case) on the home loan you have taken, if any. You can find this information in the home loan statement which you can get from your bank.

    The maximum amount you can fill in the (v) column (which is 'Interest paid on borrowed capital') under the head income from house property is Rs 2 lakh. Therefore, if the interest paid by you exceeds Rs 2 lakh in a year, the maximum amount that can be entered by you here shall be Rs 2 lakh. If you have paid Rs 2.5 lakh as interest, then form will allow you to claim a maximum of Rs 2 lakh as a deduction from the income from house property. As the annual value of the house is zero (explained above) therefore, the deduction claimed of Rs 2 lakh will result in a negative figure or loss of Rs 2 lakh under the head 'income from house property'.

    This loss will be adjusted against other heads of incomes such as income from salary or from other sources which in turn will bring down your gross income chargeable to tax. If you don't have any other income and you want to carry forward the losses, then you will have to your file return in other ITR forms because ITR-1 has no column to show the losses to be carried forward, explains Wadhwa.
    • Let-out property
    If you have chosen the option of 'Let-out' property from the drop down menu, then you will be required to fill three additional cells in the income from house property section of the ITR form. To fill these cells, you will be required to make some calculations.

    (i) Gross rent received/receivable/let-able value
    Cell number (i) under the head 'Type of house property' requires you to enter gross rent received/receivable/ let-able value of the house property. To calculate this figure, you will require two values, namely:
    a) Actual rent received/receivable
    b) Expected rent

    The higher value from the above two values will be selected as 'Gross rent received/receivable', adds Wadhwa.

    Actual rent received/receivable
    This is the actual amount received by you from your tenant during the year. If there are any arrears that are to be received, then that amount will also be added to compute this figure.

    Expected rent
    As the name suggests, it is the amount which is expected to be received as rent. To determine this value, one is required to take higher of a) Municipal valuation or, b) Fair rent provided this higher value does not exceed standard rent in cases where standard rent is applicable.

    Municipal valuation
    To determine the taxes to be paid by the house owner, the local authority conducts a survey. The survey determines the gross rental valuations of all the buildings within the area and thereby calculates the taxes to be levied.

    The gross rental value determined by the local authority is the municipal valuation you will use to determine the annual value of that house. One can find this valuation in the form you fill to pay or receipt of payment of your property taxes. These taxes vary from one local authority to another and, from one location to another, says Wadhwa.

    Some of the local authorities allow a deduction on account of repairs and use only the net municipal value to determine the tax. In that case, one must adjust net municipal value to find out the gross value.

    Fair rent
    Rent payable for similar and similarly situated properties is also taken into consideration to determine the annual value. Wadhwa says, "You can find these values from online property websites to know the rent in your locality for properties similar to yours."

    Standard rent
    If your state is governed under the Rent Control Act, then rules of this Act apply and as per these rules a landlord cannot receive anything more than the standard rent fixed under it.

    Wadhwa says, "It is the rent fixed under the State Rent Control Act for encouraging fair return to the landlords and preventing undue harassments of tenants. This Act prevents the indiscriminate increase in the rent of the property as per the desire of the landlord. The standard rent is fixed by the Controller when either landlord or tenant files an application with him."

    Therefore, to enter the value in cell (i) corresponding to the gross rent received/receivable, you can follow these steps:
    Step 1: Take the higher value from (A) Municipal valuation or (B) Fair rent. If the Rent Control Act is applicable and standard rent is lower than the higher value, then the standard rent amount will be taken. This is the expected rent.
    Step 2: Compare the expected rent with the actual rent received by you. Higher value from the expected rent and actual rent will be your answer for the cell (i).

    (ii) Taxes paid
    In the cell number (ii), you will be required to enter the amount of taxes paid by you to the municipal authority. If you have paid taxes in the FY for which the return is being filed (FY2017-18 in this case), then you would have received a challan from the municipal authority.

    (Iii) 30% of annual value
    Once you input the gross rent received and taxes paid, the form will automatically calculate the annual value of your house property. In addition to that, the form will also calculate a deduction of 30 percent from the annual value.

    This is a straight deduction of 30 percent allowed from the annual value of let-out house property for the expenses incurred in the maintenance of the house. The amount of this deduction can be seen in the cell number (iv).

    (iv) Interest paid on home loan
    In the cell number (v) you will be required to enter the interest paid by you on the home loan taken to buy that property. Unlike self-occupied property where the maximum amount you could enter is Rs 2 lakh, here you can enter the actual amount as shown in your home loan statement even if it exceeds Rs 2 lakh. However, the maximum loss you can claim under this head is Rs 2 lakh. The residual amount can be carried forward. However, to carry forward the loss, the return has to be filed in other ITR forms because there is no column in ITR-1 to show the losses to be carried forward, adds Wadhwa.

    Suppose your rental income is Rs 2 lakh, whereas the interest paid by you in FY 2017-18 is Rs 5 lakh. Therefore, Rs 3 lakh is your loss. Out of this, only Rs 2 lakh will be available for adjusting against the other heads, i.e., income from salary and income from other sources. The residual amount of Rs 1 lakh can be carried forward to next year subject to filing of return in other ITR Forms.

    Pre-construction period
    "If any pre-construction interest is paid by the individual to buy or construct that property, then a deduction is allowed in five equal instalments from the year in which that house property is acquired or construction is completed," says Wadhwa. This means that your total pre-construction interest will be divided into five equal instalments and one-fifth of that interest is added to your total interest paid each year for five consecutive years.

    However, for self-occupied property, the maximum deduction on pre-construction period and total interest paid during the year cannot exceed Rs 2 lakh. Any amount exceeding Rs 2 lakh will lapse. For let-out properties, there is no limit on maximum amount of interest paid including pre-construction period. However, the maximum loss will be of Rs 2 lakh only. The residual amount can be carried forward to the next year if return is filed in other ITR Forms.

    Wadhwa says, "Pre-construction period benefit will be restricted to Rs 30,000 if any of these conditions are satisfied." These conditions are:
    a)When loan is taken on or after April 1, 1999 for acquiring or constructing a property but the acquisition or construction of that property is not completed with five years (3 years up to Assessment Year 2016-17) from the end of the financial year in which loan was taken.
    b) If loan is taken for repairs or renovation of the house.

    Once all the required values are entered, the form will automatically calculate the 'Income chargeable under the head house property'.

    Once income from house property is calculated, you will be required to calculate and enter income from other sources.


    Please read IREF rules | FAQ's


    Have any questions or thoughts about this?