Let’s see how the Income Tax Act defines Income from House Property.
The ‘Owner’ of a House Property is taxed on the income under the head ‘Income from House Property’. House Property could be your home, an office, a shop, a building or some land attached to the building say a car parking.
An ‘Owner’ is someone who is a legal owner or a deemed owner (see clubbing provisions here https://blog.cleartax.in/clubbing-of-income-under-income-tax-act/ ). The owner must own the property in the year for which tax is being calculated – the owner may have sold the property when the time comes for submission of the IT return, that does not impact the taxability of the owner for this property in the year for which tax is being calculated.
How is the Income from House Property Calculated
Gross Annual Value is the amount at which we can expect the property to be let out and earn an income. This is the rent a similar property will earn in the same neighborhood or we can use the municipal valuation if that is available. The property may not be actually let out. When it is actually let out – the rent agreed may be more than the Reasonable Rent amount mentioned above– in this case the Actual Rent will be the Gross Annual Value. If the Actual Rent is less than the Reasonable Rent – the Reasonable Rent is the Gross Annual Value. This happens where the Actual Rent is influenced by factors such as tenant may be a relative of the landlord, or one is letting out on emergency and such other cases.
Municipal Taxes are the taxes payable by the owner. These are levied by the local authority with respect to the house property owned. These are deductible when they are paid by the owner.
Deductions under section 24 are (a) standard deduction and (b) interest on borrowed money. Standard Deduction is 30% of the Net Annual Value calculated above. Deduction for interest on money borrowed is allowed on accrual basis (allowed even though interest may not actually have been paid). The loan may have been taken for purchase, construction, repair or reconstruction of the property.
The net of this value is the Income from House Property – note that deductions listed under section 24 are exhaustive – no further deductions of any nature are allowed.
What happens when you own a single house and live in it? Or partially let it out? Or when you use your house property to carry on your business or freelancing work? Keep watching out for our next post on Self Occupied House Property to know more.